How to Use Credit Cards Wisely
Credit cards have become the go-to tool to meet short-term financial requirements. The best part about credit cards is they not just provide financial assistance in emergencies but also offer a lot of rewards and benefits. However, using it wisely is a skill that should be developed by every cardholder to avoid falling into debt traps. For instance, not paying the bill on time would lead to interest charges on the entire amount due, and the cardholder would end up paying a lot more than required.
To avoid this, we have a list of practical tips that will help in better usage of credit cards.
1. Get the Right Card
When it comes to choosing a credit card, it is essential to select one that aligns with your specific financial needs and habits. To ensure that you make a wise decision, you need to have a solid understanding of your own spending patterns, including how much you typically spend, where you shop, and what types of purchases you tend to make. Once you have this information, you can begin comparing different credit cards based on their terms and conditions, taking into account factors such as the fees they charge, the interest rates they offer, and the rewards or other benefits they provide. By carefully evaluating these elements, you can find a credit card that not only suits your financial situation but also offers valuable perks and incentives that can help you save money and earn rewards over time. Ultimately, selecting the right credit card requires careful consideration and research, but doing so can pay off in the long run by helping you manage your finances more effectively and efficiently.
2. Know the Billing Cycle
After obtaining a new credit card, it's crucial for individuals to familiarize themselves with the card's billing procedures, which may differ from those of other cards. One key aspect of this process is understanding the billing cycle - the length of time between each monthly statement. This cycle can range anywhere from 25 to 45 days or longer, depending on the specific card and issuer. Knowing the duration of your billing cycle is important because any purchases made during this period will affect your next statement balance. Therefore, timing your purchases strategically can result in significant interest savings. Specifically, if you make a purchase shortly after receiving your bill, you can take advantage of an interest-free period lasting up to 45 days (or potentially longer) before having to pay for that transaction. However, keep in mind that missing payments or exceeding your credit limit can lead to penalties and higher interest charges, negating any potential benefits gained from strategic purchasing. Overall, being aware of your credit card's billing cycle and using it wisely can help you manage your debt more effectively while avoiding unnecessary costs.
3. Set up Limits
Using a credit card involves borrowing funds from a bank or financial institution, making it essentially a form of short-term loans. While credit cards offer convenience and flexibility when it comes to making purchases, it's easy to lose track of spending and end up accumulating debt that can be challenging to repay. That's why setting a sub-limit within the overall credit limit offered by the bank can be helpful in managing expenses and staying within budget. Fortunately, most banks allow customers to set up a sub-limit quickly and easily through their online banking platform or mobile app. Doing so enables cardholders to monitor their spending habits closely, ensuring that they don't overspend and risk maxing out their credit limit. Additionally, keeping expenses below the sub-limit can help maintain good credit standing, improve credit scores over time, and prevent high-interest charges associated with carrying large balances. In summary, utilizing a self-imposed sub-limit is a smart strategy for responsible credit card use and effective debt management. It allows users to enjoy the benefits of credit cards without falling prey to excessive spending or accruing unmanageable levels of debt.
4. Smart Repayment
Many modern credit cards now offer the option to convert large purchases or even the entire monthly bill into Equated Monthly Installments (EMIs), providing cardholders with greater flexibility and control over their finances. With EMIs, consumers can spread the cost of big-ticket items like electronics, appliances, furniture, or travel bookings over several months, allowing them to manage their cash flow better and plan their expenditures more effectively. Moreover, some credit cards come with attractive interest rates or zero percent interest schemes for EMI conversions, further reducing the burden of debt and enabling consumers to afford expensive products or services that might otherwise be beyond their immediate means.
However, it's essential to exercise caution and prudence when opting for EMI payment plans, as they can sometimes encourage impulsive buying behavior and reckless spending. Before availing oneself of this facility, cardholders should carefully evaluate whether the purchase is genuinely necessary and affordable, considering their income level, existing debts, and financial goals. Ideally, EMI conversions should be reserved for situations where there are clear benefits, such as acquiring essential household goods, financing education or healthcare expenses, or investing in assets that generate long-term value. By using EMI conversion facilities judiciously and responsibly, credit card holders can manage their finances more effectively, meet their financial obligations, and fulfill various necessities while avoiding unsustainable debt traps.
5. Timely Payments
Paying credit card bills promptly is always a good idea since it prevents additional costs like late fees and interest charges, which can add up over time. Furthermore, consistent on-time payments demonstrate fiscal responsibility and contribute positively to building a healthy credit score and history. Lenders consider both aspects when deciding whether to approve loan applications in the future. Consequently, maintaining a positive credit record increases the likelihood of securing favorable loan terms, such as lower interest rates and more accessible approval processes. On the contrary, tardy payments and poor credit histories can hinder access to loans or result in less desirable lending arrangements. Thus, developing and sticking to a regular payment schedule can significantly benefit credit card users seeking to optimize their financial health and opportunities. Remember, consistently meeting due dates fosters trust and confidence among lenders, leading to improved financial prospects in the long term.
6. Avoid Cash Withdrawals
Drawing cash from credit cards is generally discouraged due to the steep costs involved, primarily in the form of higher interest rates and charges. Moreover, unlike purchases, cash advances usually do not come with grace periods, meaning that interest starts accruing immediately upon withdrawal rather than at the end of the billing cycle. This feature compounds the already high expense of borrowing against one's credit line, resulting in substantially larger outstanding balances. It is advisable to reserve credit card cash advances solely for emergency situations or circumstances where no other alternatives exist.
7. Set alerts and auto-debit
Having too many credit cards with different due dates can make it difficult to remember when to pay bills. If you miss a payment, you might have to pay more interest and penalty fees. To avoid this problem, you can set up alerts that tell you when your bills are due so you won't forget. Most banks also let you set up automatic payments, called "auto-debits," so you never miss a due date. This can help you avoid extra charges and keep your credit history clean.
8. Security
Whenever you buy something, either in person or online, double-check that the seller is reputable and reliable. Scammers and fraudulent merchants lurk everywhere, waiting to steal sensitive information from unsuspecting victims. Protect yourself by verifying credentials, reading reviews, and confirming secure connections.
Furthermore, curtailing the utilization of contactless payment methods—like "Tap & Pay"—adds an extra layer of protection to your plastic pal. Although convenient, this feature increases vulnerabilities, exposing cards to accidental or intentional swipes near unattended devices. Limiting tap-and-go usage diminishes exposure risks, fortifying your defenses against cybercriminals and erroneous transactions alike. Implementing safety measures while shopping conserves peace of mind and preserves financial integrity.
Conclusion
It is important to remember that a credit card isn’t free money; it is a loan. By following the above-mentioned tips, individuals can use their credit cards wisely as a financial tool and maintain a good credit history that will help them in the future. Check Federal Bank's Beginner's Guide to get maximum benefits from a credit card!