Credit cards are often demonized by many amongst us just because people simply don’t know how to use one. And when the company charges them penalty, they will tell you stories why credit card companies are fraud. Continuing from my previous article about why you should have a credit card, I am writing this article to list out things you should be aware of about your credit card.
1. Fee and Charges
Unless specified as lifetime free, cards generally come at a cost. You pay joining fee with first bill, and annual fee in subsequent years. Sometimes joining fee can be waived off as an on-boarding offer, but this might come as a shock when they don’t waive off the charges from next year. Note that, some credit cards come with a spend target for waiver of annual charges, if you fail to hit the spends in previous year, your charges wont be waived off.
Also, even if you are not using your card, you will have to pay the charges every year. Having said that, understand what you are paying for. Different cards offer different benefits. So only signup for the card whose fee justifies that of the benefits you are getting, and if not, there are so many cards offered on lifetime free basis.
2. Minimum amount due
Though the name suggests it’s okay to pay a minimum due and forget the repayment till next bill, it’s not. You should always pay the whole amount by the due date. Minimum amount clause is there only to keep credit card companies from sending a default to credit beureau and nothing more than that. You will still be charged interest not only on the whole amount, but also on the new purchases you make. Because if you don’t clear your bills by due date, your interest free credit period does not get reset. On top of that, you may also be charged a late fee depending upon how much amount is due.
3. Pay on time
This is important for two reasons, first, if you delay, the report is sent to credit bureau and second, the interest is high. Cards can charge as high as 4% interest, which is monthly not annually, that turns out to be a whopping 48% annually. Now you know it’s not that wise to not pay the bill on time. But if you must, for any trivial reason, call up the card company before bill generation for any large purchase to convert it to EMI. It still charges the interest, but that would be way lower.
4. No cost EMI or Zero% interest
Shops often offer you either zero% interest or no cost EMI. This often confuses many. To put it simple Zero% interest EMI is basically an EMI setup where you won’t be charged any interest, but you might still end up paying more than the price of a product, because companies then charge processing and other kinds of fees. So make sure you know what you are signing up for.
5. Do not exhaust your credit limit
Many would not know for the fact that utilization of credit limit directly impacts our credit score. Credit agencies wont tell you the limit, but it is commonly understood that you should not go beyond 20%. Once or twice in a while is still acceptable, but if you keep your utilization high enough for months after months, for credit agencies it means you are stressing your purchasing power and thus this would add to your credit risk. And that in turn will lower your credit score. However, if you have a low credit limit compared to your expenses, ask your card provider to increase the limit.
Note that for a new holder, generally the limit offered is about 2 times the monthly take home salary, and then based on usage pattern the limit is enhanced. Some providers would do this automatically, for others you will need to ask. Also, if you are not eligible for limit enhancement based on usage, you can ask them when you get a raise.
6. Close your credit card account when not in use
When you wish to discontinue your card, don’t just simply cut it and throw. It’s not a living organism for you to think it will terminate the card. Your card account still lives, at least until the card expiry. But often, it gets renewed automatically too. And if your card is a paid one, your annual charges still apply even when you don’t use the card. You may be shocked to know some day these charges along with interest and late fee made up for a huge amount. Beside, due to several defaults, it would have already screwed up your credit score. Also, even for a lifetime free card, such card will still count towards your active credit account. Thus again impacting your credit score. Though the impact is generally very low till a threshold. So it would make sense to always close your credit card and take the acknowledgment from credit card company.
7. It’s not for increasing your purchasing power
As opposed to a general perception and marketing gimmicks, credit cards are not for you to buy things beyond your purchasing power. In simple words, think of credit card as a kind of “readily available up to 55 days interest free loan”. It’s just a tool for financial companies to earn from your transactions, so they offer you benefits in exchange for your loyalty. When you use it beyond, you are liable to pay extra for it. As simple as that, and thus you should never use your card for amount more than you can payback on monthly basis, otherwise you will simply stuck in a vicious cycle and likely end up paying a lot more than you would have had you taken a loan. On top of that, bad credit score will only further reduce your chances of availing a loan.
These are the things that you must be aware of if you own a credit card or wish to get one. As such most of these are the things you should anyway be aware of while taking any kind of loans. People who have had a credit card and despise it, for sure have missed out on at least one of the above points, but those who understand these things, surely know it’s a great tool to be rewarded for shopping. In my next article of this credit card awareness series, I will cover points that will help you maximize the benefits from your credit cards.
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