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Credit card is a friend in need. Don’t abuse it

LiveMint logoLiveMint 30-03-2017 Sunita Abraham

The credit card can either be an easy and convenient money tool or the snake in your wallet, which could become the root of much of your money troubles. In situations where cash is difficult to be carried or used, a credit card offers the convenience of making payments and managing your cash situation. But to prevent it from doing harm to your financial situation, you need to exercise caution in the way you use and manage it.

Swiping the card for your purchases, without having to fork out cash immediately may give you the feeling that you can spend endlessly. But there is a credit card bill that will come to you at the end of the month, for which you have to find the funds to pay.

So, limit your spending to what your income can support and what you can pay off when it is due. If you spend more than you can repay, you will be charged a very high rate of interest not only on your unpaid balances but also on any additional spending you do on the card—till your entire outstanding credit card debt is cleared.

Use the credit card to manage cash flow mismatches. If your expenses have to be met before the income is actually in hand, then the credit card can step in.

There are two caveats to this. You must be sure of receiving the income within the billing cycle of the credit card, so you can pay it off when it is due. And, when the income is in your hands, your priority should be to assign the income to meeting the credit card dues, before you use it for any other expenses.

Use the credit card regularly and pay off dues in time to help build a strong credit profile.

Restricting your credit card usage to well within your credit limit, making payments on time, staying clear of paying only the minimum amount due—are all positive behaviours that will improve your credit profile and get you benefits such as lower interest rates on loans and higher loan sanction in the future.

If you don’t use your credit cards at all, then the lenders would have that much lesser information to take a call on your credit profile. That could impact how they would take decisions about things like whether to assign you higher or lower interest costs or whether the terms of the loan should be strict or lenient, so that they don’t lose money by lending to you.

While you should avoid over-using credit cards, you should use them in emergencies, when you need to urgently access funds. In such situations, the ease of access to funds can be a lifesaver. But take care to prioritize the repayment of this debt over all other expenses, as this is a high-cost debt.

The credit card can also be used as a budgeting tool, to keep track of your expenses and depending on the terms of your credit card, you can also earn points on card usage, which can be very attractive in some cases.

The biggest risk with credit card usage is not understanding the terms on which the credit card was issued. When used as it is intended to, credit card is a cost-free, short-term loan; provided you pay the credit card balance on time. If you don’t, it becomes a high-cost debt.

Take time out to know details such as: how the interest payable on your balances is calculated, the conditions under which interest rates payable may go up, what types of card usages attract fees—which could include cash withdrawals. Knowing all this helps you use the card properly.

Read the statement thoroughly when you receive it. Make sure credits for payments made reflect correctly and on time. Check that the transactions are reported and charged correctly and there are no unauthorized transactions. Report disputes, if any, within the time specified. Card statements also have information about your reward points and other offers that may be useful to you. Use that information.

Paying the minimum amount due does not mean you are done with your repayment obligations. Till the dues are fully cleared, you will pay a high cost in many other ways. First, you will be charged a high rate of interest on the outstanding balance and all future purchases till you clear all the dues. You will have no free credit period anymore and every time you use the card you will be charged interest immediately.

The cash withdrawal facility offered on credit cards is also a loan, on which you are charged interest from the day you withdraw. There is no free credit period for withdrawals and apart from the interest there is also a transaction fee, which may be as high as 2.5%.

Be disciplined in the way you use and manage your credit card. It is in your interest to do so. It keeps you out of debt and you are more in control of your finances.

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