Understanding How To Use Credit Cards - the Smart Way

India has entered the era of plastic money. Credit is abundantly available just through the swipe of a card, with no questions being asked. Credit card marketers are enticing people into spending more than necessary. Being in debt, through use of credit cards, can results in a vicious cycle. Therefore, proper caution and restraint needs to be exercised when using credit cards. Here are a few basic things that you must know and do to get the best out of using your credit card.

What is a credit card?

A credit card is a facility by which the issuer of the card, the lending organization, agrees to provide credit to the user of the card, up to a certain period of time, at the end of which the outstanding amount is expected to be paid back to the lender. If the amount is not paid back in full, then the lender will levy a charge. Credit cards are the most expensive form of debt available, and should be used only if one has the discipline to pay back one’s dues in time.

The major benefit of a credit card is convenience. The issuer is willing to give you a loan. As a customer, you should use credit cards only for short-term gaps in your ability to purchase goods or services. Ultimately, you have to pay the loan amount back. And if you don’t have the money, then you will pay heavily for it in late fees and charges, which could often be more than you originally spent on the card.

Terms and conditions

Every card will come with terms and conditions. These will specify your rights and obligations towards the issuer of the card. Always read the fine print carefully. Once you start using your card it is assumed that you have read and accepted all the terms and conditions. So read and clarify what you must, before using your card.

Annual fees

Earlier it was common practice for banks to waive annual fees for the first and second year and not beyond this. However, as the market has become more competitive, a lot of credit card companies are doing away with the annual fees completely and are issuing life time free cards. So, shop around to see which is the best card that you can get at the cheapest fees.

Understand your billing cycle

A billing cycle is the period between two statement dates and is normally a period of 30 days. While using your card to buy big ticket items, time your purchase in such a way that you get a longer credit period. For instance, you could use your card to make a purchase at the beginning of your billing cycle. This way you get more time to pay back the issuer because you will not get a bill for at least a few weeks. In case you have more than one card ensure that the statement dates and payment due dates fall on different dates, so that your payments are not due on the same date.

Minimum payment due

The minimum payment due every month is generally 3% to 5 % of your total amount due, but that does not mean that you should pay only this small amount. It is strongly advisable to pay the entire outstanding amount due in one go in order to avoid carrying forward of your balance. The moment you start carrying forward your balance you will have to pay an interest on the unpaid amount. The interest charged could be as high as 40% which is almost double the rate any other lender will charge. This is where you have to be judicious and pay off as soon as possible to avoid credit card debt.

Late payment fees

Late payment fees are charged as penalty for not paying the minimum amount due, on time. The penalty levied is 30% to 35% of your minimum amount due. Default in paying your minimum balance can also lead to discontinuance of the card and will hurt your credit rating.

Service tax

Service tax is the tax levied by the card issuer for using their services which is 12.36%.

Cash advance limit

Credit card companies often allow cash withdrawals from an ATM up to a certain limit. The limit can vary from person to person depending upon their individual profile. Use this facility only in emergencies as interest is charged from the date of withdrawal itself. You might find it cheaper to take a personal loan, as these loans are cheaper than credit card debt.

Balance transfer charges

Today banks are wooing customers with the 0% interest balance transfer facility. Balance transfer is the transfer of outstanding debts on one card to another lesser used card or a new one for a nominal interest or 0 interest. What you must know is that this offer is valid only for the introductory period of 3 to 6 months. After this period, the interest will revert to the previous rate that you were paying. Free balance transfers is a trick that card issuers use to get you to switch your cards to them, by offering you a short-term benefit. In the long-term, you are still liable to paying off your outstanding amount, and no amount of balance transfer can save you from credit card debt.

Rewards schemes

All credit card issuers have numerous reward schemes to promote card usage among customers. Each time you spend a certain amount of money, you accumulate some points. These points can be redeemed in return for discounts, products etc. Be cautious and don’t spend on unnecessary products just to gain points. Similarly read the fine print before going in for any cash back offers during festival times. Please be aware that you will not be able to redeem your points as conveniently as you think. Often discounts are available over a limited period of time, or on a first come first service basis.

A word of caution

Be careful when using your card. If you notice anything suspicious, inform your card issuer so they can monitor activity on your card. Under no circumstances should you share your card with someone who you do not trust. Please do not share the security code on the back of your card with anyone. Above all, pay all your dues on time. This is the best way to use your credit cards.

By exercising caution you can make the most of your credit cards. Happy swiping!