Using credit cards for ATM withdrawals? Here're errors that you must avoid

Withdrawing cash from ATMs using credit cards attract interest from the date of withdrawal till it is repaid

Getting their first credit card makes many people feel empowered. Not having to carry cash all the time is also convenient. However, if the card is not used judiciously, it can cause havoc with one’s personal finances, as Harsh Shukla, a 28-year-old Noida-based information technology professional, discovered (see box). Here are some of the credit card-related errors that users need to avoid.

Cardholders often spend, with scant regard to their repayment ability. “Use credit cards only to buy things you need and spend only what you will be able to pay off fully at the end of the month,” says Sanjeev Govila, chief executive officer, Hum Fauji Initiatives.

Keep the due date for payment in mind or give an ECS (electronic clearance service) mandate for automatic payment. “If you make a late payment you will be hit with a late fee, over and above the interest,” says Govila.

Many credit card users, especially inexperienced ones, pay only the minimum amount due every month, which could be as low as 5 per cent of the outstanding dues. This is a sure shot road to a debt trap. “Doing so will exempt you only from late payment fee. You will have to pay a heavy interest on the balance,” says Milin Shah, head of products, Happyness Factory.

The remaining amount will get rolled over to the next billing cycle and attract finance charges after the due date of the existing bill cycle. “Any fresh transaction you make will also attract finance charges from day one. At 3.5 per cent per month on the average daily balance method, the charges work out to 42 per cent annually,” says Niranjan Kumar Laxman Upadhye, general manager, fraud risk management division, Worldline India.

Every credit card comes with a maximum spending limit, which depends on your income and credit history. If you repeatedly use your card to the maximum permissible limit, you will end up harming your credit score. This will in turn affect your ability to borrow in future.

Lenders also do not like people applying for too many cards. “If you do so within a short span, it will act as a red flag. Lenders may reject your applications,” says Govila.

Owning multiple cards makes too much credit available easily, which can lead to over-spending. “It is easier to manage expenses if you have a limited number of cards. You will not have to split expenses on different cards and keep track of multiple statements,” says Shah.

Most people do not check their credit card bills for discrepancies. Due to technical glitches, you could be charged twice for the same payment. Additional charges or interest could be slapped on you. “Make sure you recognise every charge, all refunds go into your account, and cancelled subscriptions are no longer being charged,” says Govila.

Credit cards can be used in a disciplined manner to win cash back, travel points, and reward points. But many people do not bother to use the points they have accumulated. On the other hand, many indulge in excessive spending just to chase reward points, which is self-defeating. 

Many users also use their credit cards to withdraw money from ATMs. Such a sum attracts interest from the date of withdrawal till it is repaid. People sometimes use their credit cards when they are abroad. Banks levy additional charges for international transactions (like cross-currency charges), which make them expensive. “Withdrawals and international transactions should be made only in the case of a grave emergency,” says Shah.

Finally, many users do not report lost or stolen cards promptly to their banks, so that the latter can close or freeze the account, and prevent unauthorised usage.

• Harsh Shukla, 28, an information technology (IT) professional, began using credit cards from the age of 24, when he got his first job 
• Initially, he harboured the misconception that he could just pay the minimum amount and roll over the balance 
• At one point, he had dues worth Rs 43,000, when his salary was only Rs 45,000 
• Only by using a year’s entire bonus, and a hefty part of his monthly salary for several months (which made the going very difficult), Shukla managed to extricate himself from the debt trap he had fallen into