Here are 6 tips that can help you use your credit card smartly

The ease and convenience of credit cards have made them indispensable. They have revolutionised how we make payments and manage our finances.

India’s credit card market is growing exponentially. According to the BankBazaar India Credit Card Report, “India is fast approaching the 100 million credit card outstanding mark, with four prominent banks holding 71% of the credit card market share.”

Encouraged by reward programs, cashback incentives, airline miles, no-cost EMIs, and premium rewards, Indians are swiping their credit cards for big-ticket purchases more than ever before. This trend is directly reflected in the steady growth of average credit card transactions. According to the report, the average credit card transaction stood at Rs 4,731 in April 2022 and grew to Rs 5,120 per transaction in April 2023. Similarly, the average monthly spending per card stood at Rs 14,070 in April 2022 and rose to Rs 15,388 in April 2023. Also, outstanding debt on credit cards grew a whopping 30% from Rs 1.54 lakh crore to Rs 2 lakh crore over the period.

Adhil Shetty, CEO of BankBazaar.com, said, “Many people use credit cards to accumulate rewards and enjoy additional perks to offset some lifestyle expenses. However, all these benefits are best enjoyed when credit cards are used responsibly. Owing to the easy credit that they offer, credit cards can easily lead to overspending, leading to debt, high-interest payments, and financial stress." 

However, you can adopt several effective tips to use your credit card responsibly and smartly. Let's look at some of these.  

Create a budget to track spending and avoid overspending 

Prepare a budget that outlines your income, necessary expenses and saving goals and stick to it. This will prevent you from overspending, especially if you use your credit card for making purchases that are part of your budget.

Many credit card issuers have online portals or mobile apps that help you track your transaction activity. This can help you spot instances of overspending, which you can rectify by adjusting your budget. Also, you must pay off your bill dues every month on time.

Stick to your credit utilisation limit (CUR)

Credit utilisation ratio or CUR is the percentage of your total available credit limit versus the amount of credit used by you. While using a credit card, experts recommend that you keep your CUR to under 30%, i.e., use only up to 30% of your total available credit limit.

You may avoid incurring a late payment fee by paying only the minimum amount due (MAD) on your outstanding credit card bill. However, the remaining balance due will continue accruing interest at a pre-set rate decided by your bank/card issuer. This will increase your credit utilisation and CUR, which can lower your credit score.

Pay outstanding dues in full, avoid minimum payments

For making credit card payments, you usually have two options - Pay the full outstanding amount or the minimum amount due (MAD), typically 5% of the outstanding amount. "It is always advisable to pay your dues in full, which will help you avoid late payment penalties and interest charges while helping you build a healthy credit score," said Shetty.

If you are facing a cash crunch and cannot pay the full outstanding amount, you can pay the MAD to keep your card active while avoiding a late payment fee. However, you will still be liable to pay interest on the remaining bill amount and new transactions until the previous balance is paid in full. So, while paying the MAD will prevent you from being classified as a defaulter, it will increase your credit utilisation ratio (CUR), impacting your credit score.

Avoid cash advances

Cash advances on your credit card often come with high fees and interest charges. Refrain from using your credit card to withdraw cash unless in an absolute emergency. If you need cash, consider alternative options, such as using a debit card or obtaining a personal loan with lower interest rates.

Utilise rewards and benefits

Credit cards usually offer reward benefits which can be utilised for saving money on a variety of expenses. Whether it’s cash back, airline miles, or discounts on specific purchases, understand the rewards program and use your credit card strategically to maximise these benefits. During the festive season, many e-commerce websites and offline retailers offer attractive deals on credit card purchases. When shopping during this time, compare online and offline deals on products you want to buy to bag the best deal.

While benefits are great for saving money, spending indiscriminately simply accumulating reward points and availing benefits is not advisable. This can lead to overspending and land you in debt.

Protect your card information

When using your credit card online or offline, protect your card details and personal information to prevent unauthorised use and potential fraud. You must keep your card safe and use it only on credible, reputable websites or establishments. Be cautious when sharing your credit card or personal details. Check your credit card statements regularly to avoid missing unauthorised transactions. In case of such transactions, report them to your card issuer immediately.