Credit cards are becoming a preferred financial tool for many people, especially those who hold bank accounts. Credit cards are a convenient way to pay the bills but they have also been known to put people in financial debt. Some people are tempted to use a credit card when they do not have cash without a worry of how they will pay. You should never be in the habit of using a credit card as a way of borrowing money, as this will mess you up financially. If you cannot pay your credit card bills on time, or if you spend on your card more than you earn, the best advice is not to have one. A credit card requires responsible money management otherwise it can become a huge burden to the holder.
Using credit cards carelessly can lead to debt – heavy debt, indeed, because interest on credit cards can be quite high. It is important to think carefully before you whip out your credit card to pay the bills, as credit cards can be dangerous. Just as you would handle any dangerous weapon such as a knife with care, you need to be careful with credit cards to avoid hurting yourself. However, if you can use a credit card only on budgeted items and are able to pay up the entire bill on time, you can make your credit card pay for you. Using credit cards wisely can actually give you a financial edge. You can use credit cards without getting burned, but you have to be a good financial manager.
When you buy something with a credit card, you are actually taking out a small loan from the card issuer, and so you owe that amount under your credit card terms. If you pay your balance in full every month, the card basically gives you interest free, short-term loan. Of course the card issuer does not like that – he wants you to pay a specified minimum amount each month so he can earn interest on the balance. If you carry a balance from one month to the next, you will end up paying high interest rates and if you default you will not only be paying interest, but also high penalties.
There is a difference between a credit card company and a card issuer. The card issuer is the bank that has issued your card and the credit card company is the card owner such as Visa or MasterCard. Though credit cards and debit cards are similar, they are not the same. Debit cards are tied directly to a bank account, while credit cards let you borrow money from the issuer. Using debit card instead of credit card can keep you from overspending, because you can only use what you have in your account. But credit cards offer you more protection if your card is lost or stolen, but if someone lands with your debit card he can wipe you out clean in a matter of seconds.
There are many good reasons to use a credit card if you can manage it well:
Convenience. It is easer to carry around a single piece of plastic than to deal with cash and cheques. A lot of people like the automatic record keeping that comes with using a card as it makes it easy for you to track your expenses.
Protection. You are safer with a credit card than with cash. If your credit card is stolen, as long as you are able to report it immediately, you will be luckier than loosing a wallet full of cash. Plus credit card issuers take precaution to ensure stolen cards are not easily used.
Rewards. Some credit cards offer rewards for using them to purchase items. The more you use the card, the more the rewards.
Building credit. Having a credit card and using it wisely without incurring debts has an impact on your credit worthiness and this will count when you want to borrow big loans.
However, all these benefits are meaningless if you do not use credit cards responsibly. If you pay your full balance on time every month, a credit card can be a valuable addition to your financial toolbox. There are several credit card issuers in this country and most will claim to offer a good deal. It is important to ensure you get a card that offers you the best deal and the biggest factor to consider is whether you carry a balance on your card. If you typically carry a balance – or you think you might in the future – you should focus on cards with low interest rates. If you pay your balance in full every month, you should look for a credit card with no annual fee.
You should also check out the grace period a credit card offers before payment of interest starts. This grace period runs from the end of the billing cycle (usually the day the bill is dated) to the day the bill is due for payment. You are not charged interest this time. But if you carried a balance the previous month, then you forfeit your grace period with some credit cards, and whenever you spend on the card you are charged interest immediately.
Do not accept a second card even if it is for free unless the person you are giving is able to manage and control expenses on the card. Marriages have been known to get into trouble because a spouse has misused a supplementary card and gotten the family into huge debts. Even when you are married, it is best for each one of you to manage your own credit card within your own limitations and the family budget.
When shopping for a credit card, keep the following in mind: Take time to do research, as your goal is to find the card that best fits your situation. Do not just sign up for the first offer that comes your way. Be wary of cards peddled by your bank with many promises. If you are looking for a card that offers rewards, chose one that offers something you value. Some give points you can redeem for goods or services at designated points, while others offer discounts at various outlets. Bear in mind there is no sense earning stuff you will never use.
Watch out for extra fees charged on credit cards for features you will never use. Look for more than just low interest rates. Get to know how your credit card calculates interest – is it on an average daily balance or adjusted balance? Do not sign up for a card to get a free t-shirt or other freebies. And do not choose a card just because it offers a signup bonus or gives you a discount at your favourite store. At the end of the day you pay for all these gimmicks.
Do not overdo it – there is no reason to carry many credit cards. The fewer you have, the less there is to worry about and the easier it will be for you to track your expenses. Have only the number of credit cards you need and can manage effectively. Also, be in the habit of carrying only one card when you go out shopping. Do not just load up your wallet with plastic for the sake of it or the prestige you think it gives you. Once you make your choice of credit card, and get one, make sure you understand its limitations. Remember your goal is to pick a useful tool for managing your finances. You are not looking for a one-time bonus, but rather a long-term relationship you can live with.
You should always read the financial contract with the card issuer you choose, not just to protect yourself, but also to know your rights and obligations. Some credit cards offer a host of extra features such as shopping protection, fraud protection, extra free cards, travel assistance such as use of airport lounges etc. If you are not taking advantage of features like these, you are not getting the most from your card.
You should not let credit cards change your spending habits, no matter how much the issuer lures you to spend. A credit card should not be a license to spend money, but just a different and convenient way to pay for goods and services. The convenience of credit cards makes it far too easy to overspend and wind up in debt. If you are using credit cards to spend more than you earn, you are using them wrongly.
Many people pay for things with credit because they do not have the money to pay cash, but that is a really bad idea that will likely get you into debt. To change how you use your credit card, think of it as a debit card – do not buy anything with it unless you already have cash in the bank to pay for it or your salary will come on time to pay when its due. And do not let your credit card influence your shopping decisions. You should decide to buy something first, and then decide how to pay for it; do not tell yourself, “I have a credit card, so I can buy this.”
Also remember, a credit card is not an emergency fund. You should not be holding onto plastic “just in case something bad happens.” That is what your emergency savings fund is for. Here are some ways to use credit cards effectively:
Read the fine print: Read the legal stuff that is on the application form that comes with your card. This can be tedious but it can help you avoid headaches and help you discover hidden features. If you do not understand something, call customer service and ask them to explain.
Review your statement every month: Due dates, fees, and interest rates can change, so keep an eye on the notices that come in the mail. And double-checking the list of transactions can help you spot fraud. By paying attention, you can prevent small annoyances like extra fees or unauthorised charges from becoming big hassles.
Don’t be afraid to speak up. If you notice something strange on your bill, or want to dispute a charge, call customer service immediately.
Be wary of special offers. Be suspicious of products and services your credit card company tries to push to you. Some may not be bargains as you can find better deals elsewhere.
Pay your bills on time and in full every month. This is the way to keep credit cards under control. If you send your cheque before the due date you end up with free credit. You could also set up automatic payment with your bank to avoid penalties when you forget to pay on time.
Check expense notifications. Some credit cards have a tool that enables them alert you by SMS or email once your credit card has been used. This is a good way of avoiding fraud and also helps you to track down your expenses and ensure right amounts have been charged.