There are various factors that affect the credit score of a lender, and one of them is overspending. So, you must avoid overspending with your credit card during travel. Having a good credit score is a must to avail cheaper loans. The credit score reflects a person’s creditworthiness. This in turn will help lenders determine whether to give you loans or not.
The interest rate you obtain for your loan will also depend on your credit score. A person with a low credit score will not only find it difficult to obtain loans but also may be able to get only higher interest rates.
How Overspending Can Impact Your Credit Score And How To Prevent It?
Experts opine that overspending may temporarily affect your credit score. Overspending can result in high utilization of the credit limit which in turn will affect the credit score.
Here are some Tips to avoid overspending using credit cards during travel
Plan Your Budget:
To avoid overspending, plan your budget before a trip including the miscellaneous expenses during the trip as well. Sometimes, expenses cannot be avoided when traveling and a credit card will be extremely useful to meet such urgent expenditures.
However, you must know whether you can pay back the credit card dues in time as carrying over credit card balances can come at prohibitive costs of 2.5% to 4% monthly. Gaurav Chopra, CEO & Founder of IndiaLends opines that it is better to opt for a lower-cost personal loan to service the high-cost debt on a credit card. You can then pay off the lower-cost personal loan at your convenience.
Don’t Fall into The Trap of Rewards and Discounts:
Travel credit cards just like other cards offer rewards, cashback points, and travel miles to motivate you to utilize your card higher. These perks are beneficial but may also lead to overspending. This will attract interest charges, which will nullify the benefits of rewards. So, always buy only what you would have bought even without the card.
Restrict Your Spending Power:
Having multiple credit cards can be beneficial for various reasons. But, if it is going to tempt you to spend more, then it is ideal to have just one card. You may also request for a lower credit limit so that you will not be overspending even if you feel like it.
An important thing to remember is that having one or two credit cards with low credit limits can also affect your credit score. Your CUR or the percentage of the available credit that you are using at any given time is an important factor in your credit score.
For example, if your credit limit is Rs. 1 Lakh and you spend Rs. 90,000, then your CUR will be 90%. A high CUR indicates credit hungriness. This causes a dip in your credit score. It is fine to hit your spending limit once in a while for foreign trips or taking expensive vacations. But, ideally, it is good to stay within a CUR of 30%.
And it is highly likely that you will end up with a high CUR if you don’t have much available credit.
What is Credit Limit and Credit Overlimit?
Credit limit is the maximum amount you can spend with your credit card at any given time. Credit card limits are imposed to make sure that you restrict your spending. This way, you can repay your credit card bills on time without defaulting.
The credit limit is usually set at the time of issuing the card, but it can also be set periodically based on the cardholder’s credit score, income, and repayment history. The credit limit is set depending on several factors, such as income and credit profile.
When you use your credit card in excess of the credit limit defined, it is called credit overlimit. The user can either cancel the transaction that goes above the credit limit or continue the transaction overlimit.
Spending above the credit limit is called overspending. Credit overlimit is a facility given to all users. It is given by the card issuer but is subject to certain terms and conditions.
If you have already fallen into credit card debt due to overspending, avoid making more purchases with your credit card. Use cash or debit card instead. Also, to clear the current debt on your credit card, make a debt payoff plan.
Also, if you owe money on multiple credit cards, you can go in for debt consolidation. Accumulating a high credit card balance disproportionate to your credit limit is going to impact your credit score drastically. This is also going to affect your future chances of obtaining credit at affordable interest rates.
If you plan to use credit cards for travel, do so with caution. Chalk out a budget, think before you make purchases during your trip, make timely payment of bills every month, and aim to pay off the balance completely to avoid high interest. If you follow the tips given above, you can avoid credit card debt easily. It is also important to consider which credit cards you are using. You can earn rewards or cash back on your spends with the right credit card.
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