Use credit cards wisely
All you need to know about credit cards to get the best out of it
You are here. So I assume you finally got a credit card and are excited to go on a shopping spree. Or you already own a credit card, but you notice your credit score is falling and you are not sure why. Or you are just out there seeking wisdom. In any case, let's dive right in.
A Credit Card is a wonderful financial instrument. If you use it right, you can enjoy interest-free credit, many rewards/privileges, and freedom from cash. But more often than not, people misuse it and end up blaming the instrument than themselves
Let’s look at some of the important aspects you should be aware of to use the credit card to the fullest while reaping additional benefits
Pay your bills on time
This might be the most obvious one but people at times do miss this deadline. Missing the due date has 2 major implications
- The interest rates charged by the banks are really high and this starts the very next day of your due date
- Your credit score is badly impacted if you miss the due date.
So, you wouldn’t want to miss the due date in any scenario.
Alternatively, paying your dues on time improves your credit score which can lead to a range of additional benefits, such as an increase in spending limit and great offers on personal loans and other financial products.
So, make sure you set a reminder or use any app to make sure you pay the dues on time. Or best of all, automate your credit card payments which give you peace of mind
Monitor your Credit Card usage
Maxing out on your credit limit is one of the most common mistakes people make and most people are not aware of the implications
Over utilization of the cards can negatively impact your credit score.
One should keep the credit utilization preferably under 40-50% and keep the fine balance between effective utilization and overspending. Setting limits on spending limit for the Credit Cards can help in avoiding overspending.
You should monitor your Credit Card transactions regularly to notice specific patterns in your spending and cut down on any unnecessary expenses. Keeping track of your spends will also ensure that unexpected transactions come to your notice and you can point them out to your bank immediately.
Know your Billing cycle
Each Credit Card has its own billing cycle. Once you are aware of the bill generation date of your Credit Card, you can maximize your interest-free period by timing your purchases
For instance, if you make a purchase just after your Credit Card bill is generated, you can enjoy up to 45 interest-free days, and sometimes more.
Let’s assume, the billing cycle falls on the 5th of every month for your card i.e. the due date is the 5th. And let’s say, your statement for the month of July is generated on June 17th. Any purchase you make after 17th June will essentially be considered in the statement generated on 17th July for which the payment has to be done before 5th August, thus providing you a window of around 45+ days
Since you opted to pay via credit and not cash, this ideally means that you have some amount of cash lying around which could be utilized for short-term investment activities (Do this carefully and sensibly)
Increase the credit limit of the card
Once you keep on paying the bills correctly and you use the card frequently, the credit card company may decide to offer you an elevated credit limit. This helps in keeping the credit utilization low and an increased credit limit automatically equates to more usable credit. So given a chance, you should opt for increasing the credit limit.
Paying the minimum due is a trap
“The minimum amount due on a credit card is the minimum amount you are required to pay, on or before the payment due date, to ensure that you do not have to pay late fees.”
If you pay only the minimum amount due for a long time, you will have to pay high-interest charges on the outstanding amount. You won't get any interest-free credit period. Along with this, your credit limit will also be reduced to the amount that you haven't repaid.
To avoid this, paying the outstanding balance in full is the right way to go about it. But, if you can’t pay in full, at least make it a point to pay the maximum you can.
Using Multiple Credit Cards
Having more than one credit card can be beneficial if you know to use them wisely and get an extended interest-free period. It also allows you to split your expenses across the cards so that the utilization can be kept low.
But this could be a double-edged sword. Having more number of cards gives us access to higher credit and people tend to spend much more than they should. Resist this urge and you are good to go.
Explore the Rewards System
You should explore the benefits that come along with your credit card.
Your Credit Card could open the door to a host of discounts on products and services besides privileges such as free lounge access and priority services at airports.
Many of the eCommerce platforms offer discounts for credit cards during festive seasons and coupled with no-cost EMI (the EMI is essentially interest-free and usually, the interest incurred will be given as a discount at the time of purchase) options, you could get the products at a steal price without emptying your pocket
Earning Reward Points on your Credit Card spends can accrue several benefits in the long run, from free flight tickets to movie vouchers to mega discounts on various products.
But do carefully scrutinize the rewards and offers. While these offers may seem beneficial, you make sure that you understand the terms thoroughly so that you don’t fall into the trap of buying something that you don’t need, just because it was on offer.
Think carefully before closing cards
Let's say, you have an old credit card lying around. You don't use the card much and has a very small credit limit. It seems sensible to just close the card right? But it's not that simple.
It's not just negative actions—such as missing a payment—that can damage your credit. Canceling an older card can also lower your credit score. The reason: Lenders care about your credit history and the longer that history the better.
Also closing down a little-used card will lower the total amount of credit available to you without reducing the amount of credit you are using. That could skew your credit ratio and make you seem like a riskier borrower.
Avoid withdrawing money at an ATM
Credit cards could be used to withdraw cash from ATMs. But you should never do so because ATM withdrawals using a credit card attract heavy charges as soon as you make the transaction (with no grace period). So, don’t treat your credit card as your bank account.
Be aware of the joining and renewal fees
Credit cards may have joining and renewing fees. Pay close attention to the fee structure and only choose the card whose fees are reasonable in comparison to the benefits it offers. Make sure to select the card that makes the most sense for you based on your usage. Don't go for the card that provides the most lucrative offerings but won't be beneficial to you. Some credit cards waiver the fees based on the usage which can help you save on annual fees.
Immediately report lost or missing credit card
If your credit card is missing, lost, or stolen, report it immediately. Credit card companies use the chip in credit cards to mitigate risk. If you don’t report your card missing, stolen, or lost, and it was used to make transactions, you can be on the hook for the charges even though they were not done by you.
Borrow only what you can pay back
Generally, the credit card limit offered to an individual is much higher than their monthly income. This means that if the person decides to splurge and exhaust the entire cred limit (which we know by now is not at all recommended), he might not be able to pay back the entire amount before the due date. So, it is important to track your monthly spending and use only an amount that you can be confident of repaying. This will save you unnecessary interest compounding, huge debts, and provide some mental peace.
Keep an eye on your credit report
Identifying improper details associated with your card is essential. The details may range from things like a change in your address or to amendments in your marital status. Sometimes, mistakes like fraudulent transactions or accounts may be linked to your card. You should invest time in reading your credit report and report any errors to the credit bureau
Don't Chase Rewards
It's awesome to find great deals for products you needed. But many a times, these rewards, freebies, and discounts are nothing but upsells.
Don’t fall for this trap – if you’re paying for something you can afford and need – you’re being wise. If you pay for something that you know is too expensive and are justifying it just with the reward points or cashback offers – you took the wrong bus
Your purchasing decision shouldn't be driven by points, rewards, or benefits but primarily on your needs. Use the card for things you need and keep a lookout for exciting offers
Hope you will keep these pointers in your future credit journey
That's all folks. Thanks for reading :)