Credit Cards: Why do we use credit cards? It gives us credit facilities, helps us with costly things through equated monthly installments (EMIs), offers discounts, and gives us the convenience of paying bills later without incurring interest on them. 

In a nutshell, it can make our lives easier if we use it in the right way. 

But if we take it for granted, miss payments regularly, or incur debts with heavy interest, a credit card can make our lives tough.

Any credit facility honours a disciplinarian who can use it the right way to get the maximum benefit.

In this write-up, we will tell you how you can use a credit card to avoid falling into a debt trap and improve your credit score.

Avoid having more than one credit card

When you take a credit card, ask yourself about your requirements for it and how you will use it.

You may use it in emergencies, for purchases you can’t afford in one go, or to take advantage of discounts.

If you think a credit card with a moderate credit limit will do the job for you, don’t go with a higher one.

If you think one card is sufficient, don’t go for a second one.

The habit of owning many credit cards may entice you to indulge in a shopping spree that may incur debt for you.

Always remember that using a credit card is like using a loan that you have to pay on time.

Credit Card Utilisation Ratio

Every credit card has a limit. It can range from thousands to a few lakhs.

The amount of credit that you use from your total credit is known as the credit utilisation ratio (CUR) or credit utilisation limit.

Though you are free to use the 100 per cent limit on your credit card, most credit card agencies recommend using only 30 per cent of your total limit for a high Cibil score.

E.g., if you have two credit cards with a Rs 1 lakh limit each, your total credit limit will be Rs 2 lakh in a cycle.

For a good Cibil score, you should not spend more than Rs 60,000 (30 per cent of your credit limit).    

Do not take credit cards due to offers or discounts

Sometimes, we purchase a credit card because it offers discounts on a particular app or a product.

However, when we have a card, along with that product, we end up purchasing many unwanted things and piling up huge bills.

At the same time, the majority of cards are not lifetime-free; you have to pay an annual maintenance bill for them.

So, purchasing a card only for a particular offer may not be the right decision most of the time.

Sudden card closure

Sometimes, if one of your credit cards is not in use for a long time, we close it abruptly.

It’s a bad practice that can damage your Cibil score.

First, it decreases your credit limit as well as your CUR, forcing lenders to think that you are using a higher amount of your available credit.

Second, it lowers the average age of your account and shortens your credit payment history.

So, the best thing is to not renew it rather than close it midway.

Withdrawing cash

Though credit cards offer cash withdrawals, using them for that purpose can also affect your Cibil score.

Withdrawing cash from an Automated Teller Machine (ATM) gives the lender the signal that your financial situation is not good, which affects your Cibil score.

Second, you have to pay a charge for such cash withdrawals.

Plus, the interest charge is calculated from the day of withdrawal.

It can be as high as 4% per month. At the same time, you get no reward points for withdrawing cash through an ATM card.