What are warning signals?
Banks are constantly monitoring your credit card activities. Reason: It’s quite possible that your financial status has changed since the bank issued you the credit card. Monitoring gives banks warning signals in advance and hence prevent bad debt. Warning signals help in identifying a potential defaulter. Here are a few things you should avoid doing as they work as warning signals:
Frequent cash withdrawals
Typically, 30% of your credit limit is available as cash advance facility. This simply means that you can use your credit card at an ATM to withdraw cash. If you use this facility often or at regular intervals or if you withdraw large amounts of cash frequently, bankers usually take this as a warning signal and may see you as a high-risk customer and a potential defaulter.
Out of pattern purchase
Not all warning signals work against you. Some actually work in your favour. For instance, every card holder usually has a pattern in which he spends. Say, on average the highest amount you spend every month is Rs30,000 even when your credit limit is Rs1.5 lakh. That’s your spend pattern. But suddenly if you make an out-of-pattern purchase of a higher amount, say Rs1.3 lakh, through your card, this appears as an out-of-pattern purchase and bank is alerted. In such a case, if the bank suspects that your card may have been used fraudulently, they might not let the transaction go through immediately before confirming with you about the same. This is over and above the regular alerts which banks send you when you use your credit card.
Borrowing to pay
There are people who are in financial hardship and give a false appearance of being creditworthy. This trick of giving a false appearance can be used in credit cards as well. Ideally, when you get your credit card statement, you should pay the total outstanding balance on your card every month. If you cannot pay the total outstanding balance, banks expect you to pay, at least, the minimum amount due on the card. At times, card members withdraw cash using their credit card and pay the minimum amount due. Though you don’t have the money, you give a false impression that you have the funds. It’s like borrowing from the bank to pay them back. This is a warning signal that many banks take seriously. Repeat this trick frequently and your credit limit may be reduced.
Being late on your payments frequently is an obvious warning signal which works against you. Not only do you land up paying a late payment fee—which could go as high as Rs.650—but you also land up with a poor credit report. Also keep in mind that frequent late payments are a warning signal that you are heading towards a debt trap.