CREDIT CARDS: IS IT A BLESSING OR A SCOURGE?
How to Augment the Utilization of your Plastic Money in the form of Credit Cards
The increased recent trend of using plastic money is now also backed by the unprecedented situations of the Global Disease Outbreak of COVID-19. The number of credit card users has also surged in the last few years, along with the number of cases of credit card fraud. Although many people are reluctant to buy or, more importantly, use credit cards, the flip side shows a rising trend of credit card subscribers and multiple cardholders. Any facility or technology comes with both sides of advantages and disadvantages. However, it is up to us whether to make it a boon or a bane. In this blog, I will explain how blissful it is to own credit card/s but only if used smartly.
The KYP Concept: Know Your Product (KYP) before Selecting
The market for credit cards has become so vast and wide that there are ample choices for customers to select which type of credit card to opt for or which card will benefit a particular customer the most. Hence, it is crucial to understand each type of credit card and what benefits and rewards you will be entitled to. While selecting your card, one must take utmost care of their spending pattern. For example, if you wish to use your credit card to pay your monthly utilities and telephone bills, select a card that rewards such spending. If you choose a credit card that gives exciting offers on air ticket purchases and does not need to travel so frequently, there is no point in going for such a card. Therefore, know the credit card you will buy, know what it offers, understand your spending pattern as in where you spend the most, and then select your card. This will allow you to leverage it to your most beneficial.
Know What Happens when you Pay only the Minimum Amount Due
While making the payment to your credit card dues, it will first ask you to pay either the total amount or the minimum due or any other amount decided by you. The correct action, in this case, is to pay the entire amount owing. When you select to pay them only the minimum amount due, thinking that they allow you to pay only the minimum dues, then you are certainly mistaken. Generally, if you have a habit of paying only the minimum amount due, the companies charge 2–4% of interest on the unpaid amount, which accumulates to 24–48% per year. It is also essential to understand that when you have any outstanding amount in your credit card statement which was due before, all your further purchases will attract interest costs as the interest-free period gets over the moment you start having outstanding balances that were due before. Thus, it is not advisable to pay only the minimum due. It is advisable to opt for EMI payments that charge 15–18% annually than to use a credit card facility if you think you may not be able to repay in total.
Claim Rewards and Benefits Offered
Credit card companies offer a wide range of benefits and reward points upon additional spending. While selecting your credit card, you must be aware of what benefits and offers you will get, and you must also start accumulating the points. One of the mistakes many credit card users make is that they do not keep track of the reward points that are being collected. Unless you know how much balance you have, you will not decide where you want to spend it. Consequently, it may also happen that these points lapse. To make the most out of it, you need to keep track of your reward points and offers and use them accordingly. Companies can often add a particular offer to your card if you approach them that you want them on your card.
Do not Default Paying the Dues
Nowadays, almost all credit cards are offered free for a lifetime. Nevertheless, one needs to be mindful of the overdue charges as when something is received for free, the cost of failing to repay the facility provided will be huge. Hence, if you fail to pay on time, there will be penalties, and interest costs levied on the outstanding amount. Moreover, the subsequent purchases will be without interest-free credits in the coming month. This also impacts your credit score that will fall, and the credit history will also get spoiled, which is the most significant loss. The remedy for this is to instruct your bank to repay monthly on a particular date with a direct debit from your account.
Say No to Withdrawing Cash Using Credit Cards
The companies will always enable your credit card to withdraw cash as they want to earn fat interest. No matter what, when you start money using your credit card, you will be charged a fixed amount that may be as high as 2.5% of the transaction amount. Additionally, the interest costs will start applying from day one of your transaction that may range between 2–4% a month. It is never a good call to withdraw money through your credit cards except for emergencies.
Escalate your Credit Limit instead Utilizing the Full Limit
The credit limit for each credit card is always defined and fixed. When you utilize an entire or a significant portion of your credit limit, it will make you look credit hungry. This will also influence your credit score. The best way out is to ask to increase your credit card company limit. This will allow you additional limitations to use and portray that you have sufficient balance in your bank that has enabled you to up the limits. One more option is to use more than one card with different credit limits. However, too much of anything is always disastrous.
Avail the Credit Period Wisely
There is a less known hack on maximizing the utilization of your credit period. When you make your purchases and spends through credit cards at the beginning of your billing cycle, you can leverage the interest-free period to the greatest extent. For example, if you receive your credit card statement on the 10th date of each month and your payments are due by the 1st of each month, your billing cycle starts from the 1 of each month. Suppose if you want to make a big purchase, you should do it at the beginning of the billing cycle, which will enable you to take advantage of the credit period that can extend to 55 days (30 days regular credit period plus 25 days grace period). On the other hand, if you make such big purchases before the 10th of the month, you will have a lesser period available as credit float.
Keep an Eye on your Credit Score
A credit score gives an idea of your creditworthiness. It is always a good practice to maintain track of your credit score as any failure, or missed payments can bring your credit score down, and it can be big trouble for you when you are planning to borrow money from financial institutions. Any glitch found in making the payments leads to bad credit history.
Spend wisely to Earn Rewards
Although credit card companies always come up with alluring schemes and offer for you to earn rewards, it is not advisable to spend blindly to accumulate the tips that you may not redeem later on. Instead, spending wisely, keeping your attention to your requirements will enable you to maximize your points and their easy availability at the time of redemption. You can also enroll in new credit cards to get enrolment points and bonus points.
Think Twice before you Cancel your Credit Card
If you own multiple cards, then do not close cards randomly. Each card will have different credit card limits, and the moment you cancel any of those cards, your credit utilization ratio gets impacted. For instance, if you have two credit cards with Rs. Twenty thousand limits each, and your utilization ratio has been 40% with Rs. 16,000 per month of total spends, divided into the two cards, then upon cancellation of one of the cards, your credit utilization ratio will surge to 80% with Rs. 16,000 per month expenditure and only one card with Rs. 20,000 credit limits. Consequently, this will hit your credit score badly, and you may lose your creditworthiness. Therefore, it is not harmful to use and keep more than one card to lower your credit score.
Closing Thoughts
The tempting offers and rewards do not come so quickly with credit cards. When you own a credit card, your purchasing power will automatically increase as you are given a credit limit, which is interest-free. Hence, any flaw or a glitch in the payment or selection of your card could become a nightmare for you. Knowing the terms and conditions well in advance will ease your selection process. Once you have an idea of maximizing the use of credit cards, you will fetch as many benefits as you can. To conclude, if you know how to use your credit cards wisely, you can make the most out of it, and that has been made so easy for you with the above tips!
