Thinking of getting a credit card? Here are a few tips on how to use it sensibly
If you have just started earning and opened a salary account, you might be new to the world of credit cards. However, since they are fairly common these days, having one is no big deal. These days many parents hand their credit cards to their kids to party or purchase items. But, having one of your own is a great feeling. Though these credit cards offer you the financial liberty to purchase anything and everything your heart desires, they can also lead you down the slippery slope of debt if you are not careful in handling your finances. Most people own multiple credit cards that are backed by different financial institutions. As a result, they can keep on purchasing stuff without having to worry about the credit limit.
How do credit cards work?
Credit cards are an excellent way in which financial institutions like banks make money. When you use a credit card to purchase any stuff, you are provided an interest-free loan on the amount for a specified period. However, many people who use credit cards generally do not have the money to pay back the amount owed, as a result, they end up owing more money to the banks. The bank charges a late payment fee along with interest rates ranging from 3-5% per month. Moreover, you also end up paying interest over the cumulative amount making it extremely difficult to break free of the vicious cycle of debt
Credit cards can land you in a soup if not used wisely!
Now that you know how banks make money through credit cards, it is easy to understand why most of them keep calling you to offer you credit cards. People who start using credit cards find the offers too good to resist, as you can easily pay for the goods you have purchased later without having to incur any charge. However, many people fail to do so and then start getting phone calls from the company. To keep up with the loan, they might take up another credit card, and then another, and eventually, the debt becomes too much to manage. This might result in a bankruptcy filing or people losing many of their assets to creditors.
If you do not wish to end up on this slippery slope, here are a few tips on managing credit cards smartly:
- Ensure that you do not overspend using your credit cards. Credit cards come with a credit limit. It can be for a few thousand or lacs. Whenever you are using your credit cards, it is important to keep in mind that the amount is always less than 50% of your credit limit. This is to ensure that your credit score is not affected due to your higher borrowing.
- Pay your bills on time. Late payments can not only harm your credit score but also result in additional charges and a high-interest rate on the amount due. Eventually, the money you owe to the credit card company becomes too much to pay back. Thus, missing even a single payment can be detrimental to your financial health.
- Do not make minimum payments on the due amount. Some people who are unable to make the complete payment think that part payment of the amount they owe to a credit card company is sufficient. Unfortunately, it is not so. The credit card companies charge an interest rate on the outstanding amount that is owed to them. Thus, if you cannot pay them the entire amount back, you should make sure that you pay as much as possible to reduce the outstanding amount.
- Simply do not use credit cards at ATM to withdraw money. Even if you are in dire need of cash, you should avoid using a credit card to get some from ATM. Though this facility is provided by most credit card companies, you will be shocked to know that the charges levied on such transactions are huge! Moreover, there is no delay period, in this case, you need to pay additional charges from the time of transactions.
- Priority should be given to high-interest rate cards. Different credit cards are available at various rates. Many people have more than a couple of credit cards. Though you should ensure that you clear all payments before they are due, if it comes to a choice, you should pay the cards that charge a higher interest rate first. This way you can avoid heavy charges being levied on outstanding dues.
- Use your credit card judiciously. Using a credit card for buying groceries, petrol, or any other essential item does not make sense unless you are really out of money. Several small purchases can add up and you might not know when you have exceeded the limit. Instead, use your credit card only to purchase items that cost a lot.
- Time your credit card usage as per your billing cycle. Credit card companies too have a billing cycle just like your internet or mobile service provider. Thus, any purchase you make should be timed keeping your billing cycle in mind. If, for instance, your billing cycle is from the 20th of a month, purchasing any item on 21st will give you more days to repay the amount, than say, if you purchase on the 15th.
- Capitalize on rewards and offers. Most companies provide you with promotional offers and reward points. Before availing of any of these, you should read the fine print and make the purchases accordingly. Accumulating reward points can result in amazing gifts like a free flight ticket!
- Do not delay in filing a missing card report. If you are unable to locate your credit card, you should not delay in filing a report as well as getting the card blocked by calling the company. This is important to prevent any fraudulent transactions from taking place on your card without your knowledge.
There are several benefits to credit cards if used properly. You should ensure that you make the best use of them.