Useful Tips On Effective Use Of Credit Cards
So, credit cards huh? Aren’t they fun? It’s kind of a freedom that you will never want to get away from. No one does unless of course, the aberration of massive bills comes to haunt screaming, ‘pay back, pay back’! Things get uglier when the interest rate keeps piling up because of late payments or partial payments. Unfortunately, the interest rate grows way faster than what we expect. Why does this all happen? Simple! Because, we have a tendency of misusing the plastic money.
Thus, if you have a credit card or perhaps two, it is time you start paying attention to your financial behaviors so that you can save yourself some trouble in near future. This article will sum up a few tips on effective use of credit cards. In order to do so, we will take a unique method of busting myths followed by a proper tip.
Read carefully. We promise that you will find this information really helpful. Let’s begin!
Myth: Credit card is gateway to free money.
Truth: If you hold this view, you are deep trouble. Credit card is free money only when you steal and manage to use someone else’s credit card. Otherwise, it is actually costly money. The interest rate charged by credit cards is much higher than prevailing market interest rates. In fact, interest rate can be as high as 15.8%.
Lifesaving Tip: Consider it as a mortgage or a loan. The only difference is that a credit card is more like a preapproved loan amount with expiry date. What does that mean? Look carefully at your card you will see an expiry date printed on it. That’s when your card expires and no longer remains usable.
Myth: Once the credit card expires, there is no need to repay the outstanding money.
Truth: Really? Stop being dumb! The expiry date is for the card and not for the repayment. So, if you are thinking that you can just use the credit card the day before it expires and then once it expires, the issuing bank will not come hunting for its money, you are very, very wrong!
Lifesaving Tip: Never use your credit card the day before it expires. If you do so, not only will you have to pay the outstanding amount (even though the card has expired), you may have to pay the entire outstanding amount in full before the bank considers renewing your card. So, if you have a large outstanding amount, paying in full is definitely going to burn your wallet to ashes.
Myth: I don’t really need to repay anything. I can default and eventually bank will let go!
Truth: This is a common notion but no, it is nowhere even close to be true. The truth is far bitter. The bank will not only chase you every single day for repayment, it may also take a drastic step of taking a legal action against you. One fine morning you may get a legal letter from bank’s legal division, asking to repay. Alternately, bank can actually stop calling you and may not even send you a legal letter. It will turn towards credit bureau. In India, it is known as CIBIL and report the default. CIBIL will immediately mark you as a defaulter and your credit score will decline. You will later find it very difficult to get new loans or even credit cards because all loan or credit card issuing authorities check CIBIL score (credit score) and credit history before approving loans.
Lifesaving Tip: Every time you use your credit card, pay your outstanding before using the credit card again. This will prevent piling up of outstanding amount to be paid and make your life easier.
Myth: I can default and later ask for settlement for a lower amount. This will not hit my credit score.
Truth: It is true that banks can agree for settlement and they very often do that. However, settlement deals are also reported by banks to the CIBIL. CIBIL considers this as a default and the credit score takes a hit. You know the story that follows.
Lifesaving Tip: Don’t opt for settlement. Rather pay your outstanding money if you want to maintain a good credit score. A good credit score is important because it will later determine whether you can get a home loan, an auto loan or other types of loans.
Myth: The more I spend using my credit card, the better it is for my credit score.
Truth: The credit score depends on multiple factors. Of course, repayment history is a big factor but there is something called ‘credit utilization ratio’. The golden rule of thumb is that this ratio should never exceed 30% in order to maintain the best credit score. So, if you have a credit limit of INR 10,000, the maximum you should spend is INR 3,000. Please read this article to know about CIBIL Score
Lifesaving Tip: Do not make big purchases using your credit card. Always keep in mind the credit utilization ratio.
Myth: Cash withdrawals using credit card has same interest-free grace period for repayment.
Truth: Interest rates are applied the very moment you use your credit card for withdrawing cash from ATMs. There is zero grace period to enjoy.
Lifesaving Tip: Never withdraw cash unless and until you are in a life and death scenario.
Myth: Accepting offers of increased credit limit by banks is foolish.
Truth: Yes, banks will try to do so to lure you into spending more. Capitalism! However, accepting such offers do not always place you in harm’s way. This is because of credit utilization ratio. Assuming that you have credit limit of INR 10,000 and you spend INR 6,000 per month and then repay, your credit utilization ratio stands at 60%. This is not good. Now, if you get an offer of increase in credit limit to INR 20,000 and you still maintain a monthly spending limit of INR 6,000, your credit utilization ratio will go back to 30% and this will positively reflect on your credit score.
Lifesaving Tip: Accept offers of increased credit limit by banks only if that helps you drag down your credit utilization ratio to 30% or below. If you intend to increase your credit spending after the credit limit is increased, you will be at a loss.
Myth: Never use a credit card. It is ugly. You need to pay interest.
Truth: This is absolutely wrong. Credit cards come in very handy, especially when it comes to improving the credit score. Moreover, every credit card issuer gives an interest-free grace period for repayment. If you pay within that grace period, you don’t pay any interest at all.
Lifesaving Tip: Just make sure that you calculate the grace period properly. First thing you need to do is to remember the billing date (i.e. the date when the credit card bill is raised by the issuer). From that date, you will have 20 days of interest-free grace period. Let us assume that your credit card billing date in 9th of every month. Now, if you use your credit card on:
- 8th of a given month, you will be billed the very next day and then you will have 20 days to repay without paying interest.
- 10th of a given month, you will be billed on 9th of next month after which you will get 20 days to repay without paying interest. This will mean that you effectively get 50 days of interest-free grace period.
Bottom line is simple! Calculate your spending date and your billing date properly to maximize the number of interest-free days you enjoy for repayment.
Generalized tips on effective use of credit cards
- Pay at least the minimum balance every month. This way you will prevent taking a hit on your credit score. However, downside is that paying the minimum amount owed will not do any good to your credit score either. It will only make sure that you pay extra in form of interests. Thus, pay your entire due every month.
- Go for multiple cards only and only if you are responsible enough to pay bills for each one of them and you are not overwhelmed by the bills. You need to be financially sound (i.e. you should have a good earning) and you should be very organized and responsible.
- Never ever share your credit card details with anyone. Not even your family members because though they may not intend any harm, they may end up misplacing the details and if, by any chance, a third party gets access to your card details because your family member made a mistake, you will be the one to take the heat.
- In case of multiple credit cards, make sure that each one of them have at least half-a-month of gap between their billing dates. This will give you ample time to accrue enough earnings for repaying your credit card debts.
- Link your credit card with your internet banking option and initiate auto-debit so that your credit card bill(s) are paid every month in time and you don’t default. This is especially good when you are working with multiple cards.
That’s it! Be sure that you play responsible. After all, it your credit history and your credit score at stake. You make a mistake and you take the heat. No one will come to rescue you out of your miseries.