Using Credit Cards Wisely

Is anyone born with knowledge of how to use credit cards ? Definitely not. Still, it’s important to learn the rules of the credit card game – preferably before one starts playing.  I am writing a few DO’s and Don’ts for credit card users. These are definitely not all but some useful tips which could help one to maximize the output from the credit card and at same time preventing him from accumulating debts.

Do’s

• Ensure that you purchase things you need and not the one’s you ‘want’. There is a difference between need and want and that has to be honored. Often wants are way beyond our budget and credit card is used to buy those wants, which are way beyond the budget.

• Make sure you pay the credit card dues on time. I used to forget the due date and as a result on several occasions have paid late fees. Then I started setting reminders in my mobile/emails or any other convenient tool. This helped me to get rid of the problem of forgetting the due date.

• Stay within 40-50% of the limit on your credit card. A large part of your credit score considers the amount of debt you have. Keeping your balances low helps you maintain a good credit score. Not only that, lower balances are easier to manage than those that are higher.

• Negotiate a lower interest rate with your credit card company. Your interest rate determines how much you pay for carrying a balance on your credit card. Evaluate the interest rate on your credit card periodically to be sure you are getting the best deal possible.

Don't

• Credit card should not be used to make everyday purchases like food, clothing, and gas. Using your credit card as a substitute for cash is a habit that can quickly lead to debt. For ordinary purchases, use the cash in your wallet or debit card instead.

• Do not get into the habit of making only the minimum payments. Making only the minimum payment each month increases the debt. Also most of the card companies charge interest on the remaining amount and new purchase from day 1. So if you do not pay the full amount, you may lose the advantage of grace period on your new purchases.

• Do not close out a credit card without knowing how your credit will be impacted. Avoid closing cards that still have a balance or those that make up a significant amount of your credit history. This may impact your credit score.

Choosing the Right Credit Card

Whether you walk in a super store, or checking your email, you would surely be flooded with offers for new cards. It's easy to apply for a credit card simply because the offer looks good, but have you really stopped to think about whether that's the right card for you. You can save hundreds, and maybe even thousands, of rupees by shopping around for a credit card.

Before applying for a credit card, find answers to a few important questions. The answers to most of these questions can be found in the disclosure included with the credit card application, which I agree is itself a task to read through.

What Type of card is it?

There are many different types of credit cards to choose from: Regular credit cards, rewards credit cards, loyalty cards, petro cards, to name a few. Understand what kind of card you’re applying for and whether you really need it before filling out the application.

How are you going to use the credit card?

If you are the one who pays the full balance timely then you could go for a card which may have interest charged at the end of grace period.  If you intend to use your card for balance transfers ? You should then look for a card with a low interest rate on balance transfers. If you plan to carry a balance from one month to the next, then a credit card with a low interest rate is ideal. If you shop mostly from a specific store then you could go for a loyalty card specific to that store. This helps you to accumulate the loyalty points which could be redeemed later.

How long is the grace period?

The grace period is the amount of time you get to pay your balance in full before a finance charge is added. The period is usually expressed in days from the billing date, example :  “28 days from the billing date”. Longer grace periods are better because they give you more time to pay your bill without incurring a cost for the convenience of using credit. However If you already have a balance on the credit card, new purchases may not have a grace period.

What are the fees?

You should enquire about the fees and the circumstances under which the fees are applied. The most common types of fees include: annual fee, late fee, and over-the-limit fee. There may also be additional fees for paying your account over the phone on the due date, requesting additional copies of your statement, or for having your check returned. Most people don’t check these and later pay money for using these features. Its better to check for them before applying for the card.

How is the finance charge calculated?

The credit card company’s method of calculating the finance charge has an impact on the amount of the charge. Some methods consider only the current month’s balance while others consider the current and previous months’ balances. New purchases may or may not be included in the calculation. This needs to be checked before you apply for the card. This is especially important for those who tend to over spend and then pay in installments.

What is the credit limit?

The credit limit influences your purchasing power. If you are the one who tend to overspend, then start with a low credit limit. This helps you in keeping a tab on your spending which in turn helps in preventing default and a hit on your credit score.

What are the rewards?

Some credit cards offer rewards for using your credit card. Make sure you fully understand the reward structure and the amount of purchases you have to make to receive the reward. Also please check for the validity period of the reward points. This is important so that you could use the reward points before they lapse.

 Credit Card Basics

Before you start shopping around for a credit card, think about how you will use it and set some guidelines for yourself. Here are five key points to remember:

1. A credit card doesn’t increase the money you have available, it simply gives you the ease of paying a bit later. So all your credit card spending should fit within your regular budget.

2. Using a credit card to get cash or for other cash-like transactions, such as a wire transfer or money order, is generally not a good idea. It costs you interest from the date of the transaction. If possible, do not use your credit card for cash withdrawal. Instead use your debit card.

3. If you pay your credit card balance in full every month and you don’t use the card for cash transactions, you will never have to pay interest. If you don’t pay in full, the interest charges you pay will incur on every new transaction from day 1. You won’t get any grace period for the new transactions. This would increase the cost of everything you buy with the card.

4. If your credit card balance grows from month to month, that’s a sign that you are overspending and could be on the road to serious debt problems. Stop using your card until you get your debts under control.

5. Applying for a new credit card because you have reached your credit limit on your other cards is not a good solution to managing your debt. Instead, look seriously at how you can reduce spending.

Most credit cards, whether they are standard, gold or platinum, have the same basic function: they offer a convenient way to pay for goods and services. The main differences are in three areas: interest rates, fees, and rewards and benefits. Looking carefully at those details will help you find the right credit card for you. I will write about these aspects in the coming articles… stay tuned.