Blog: Using your credit card wisely
A credit card offers huge financial freedom if you know to use it wisely.
The issuing companies make most of their money from the indiscriminate users who go about spending on the card without understanding some of the basic rules in using them. These are not things that any issuer would tell you explicitly, precisely because it is not in their interest that you are a wise user. Then on the other spectrum are people who have an irrational fear of credit cards because they consider them debt traps waiting to swallow them. That too is an exaggerated fear. A credit card can be your best friend if used with prudence. There are many great credit card deals with rewards that make life much simpler.
Here are some basic rules to follow, to understand the features of a credit card and thereby find out ways to improve financial health.
Spend cautiously and never more than your means – This is the cardinal rule you should have in mind if you intend to get a credit card. You should also have the discipline to follow the rule religiously and consistently. Spending within your means is important with or without a credit card but with credit cards it assumes more importance. The temptation to go overboard and overspend without having a corresponding capability to pay up in full is the easiest way to fall into a debt trap. So, unless this first rule is something you can’t follow strictly, the other points that we discuss going forward become moot.
Get a credit card with maximum possible credit limit – When you apply for a credit card try to get the maximum limit for it not withstanding how much out of that you may eventually end up using. The primary use of a credit card is during emergencies and an emergency expenditure could be a high amount which could be dealt easily with a bigger credit limit that offers more flexibility. Also, when you have a higher limit but use way lesser than your actual limit, it improves your credit score because you prove yourself to be a prudent credit card user who does not go crazy with the usage. A low credit utilization ratio keeps your credibility high. You can also avail many Credit card food offers, travel rewards as well as cashback offers that gets accrued.
Understand and make maximum use of the reward system – Credit cards issued by some of the best issuers have very good point accumulation and reward systems. You can collect air miles or make useful buys at the year-end using your accumulated points. Hence, while choosing an issuer it is also important to understand the reward system calculation and the redemption options. That said, it makes sense not to accumulate your points for too long. At some point if you decide to cancel the card for any reason, using up all the accumulated points at one go might not be easy. I personally had a situation when about 60,000 miles of mine were as good as nothing when an airline went under with losses and closed operations.
Make most of your big-ticket payments using the card – This is the easiest way to get your reward point soaring. Also, there is a good amount of credit period you get before you have to pay for it. You can plan your other expenditures and defer or advance some of them depending on the dues you have for the month. They would not put a financial strain all of a sudden when you are aware of the payment due date. Your insurance payments and some of the taxes can be also be taken on your card. This offers great flexibility and is a great way to collect reward points.
Always pay in full before the due date. Minimum dues payment option is the biggest trap – You are the worst customer for your credit card issuer if you pay in full on the due date. And, that is who you should aspire to be as well. They lure you to pay just the minimum payment by putting it across as a favor being done to you. There will be many credit card payment offers that maybe sent your way too. The interest dues that get accumulated with that is exponential and it is charged at very high percentages. The best use of a credit card is when you pay the entire amount in full on or before the due date. A standing instruction to debit your bank account is the best way to ensure that happens and that you don’t miss the due dates, thereby attracting penalty.
Do not use your credit card to withdraw money in the ATM – This is yet another trap which many people fall into without having an idea that the concept of an ATM card is very different from that of a credit card. Unlike an ATM card, you are not withdrawing money that belongs to you, but you are withdrawing money from your issuer. You are taking a loan or credit from them, which naturally attracts interest exactly like how it happens when you pay just the minimum due amount and stay their debtor.
Do not share your passwords and OTPs and don’t use them indiscriminately in questionable websites– One of the easiest ways to fall victim to a fraud or scam and end up having your card misused is when you share passwords, carelessly use them or have pins written down in a way that it can be seen and used by strangers. You should try to limit your cards to make only bonafide payments in well-known websites of good repute and that use encryption (the little lock symbol ou see at the bottom of your browser when you visit online websites). The number of online financial frauds happening has been burgeoning over the years and prudence and caution are the watch words to prevent misuse.
Negotiate to get the joining fee and yearly fees waived– With ever increasing number of credit card issuers, there is a lot of competition they face among themselves. In this situation, they would be more forthcoming to waive the yearly fees and fixed charges for advancing business interests. You have an upper-hand in negotiating a deal as they need your business more than you need them.
Do not own too many cards – If you manage to wriggle out a good deal in terms of credit limits, then it is wiser to just have one credit card or at the most two. It is only human to have a tendency to overspend. Moreover, keeping a tab on payment cycles and due dates also gets difficult with multiple cards. Over time when you are loyal to one card and thereby have a good usage and payment history your credit limit keeps increasing as well.
Check the monthly statements – It might sound a boring thing to do but I always file my credit card statements and spend ten minutes checking the charges against the slips or the account I keep of the spends done on the card. There is a saying in India which roughly translates to ‘Even if you pour milk into the sea, measure and pour’ You need to know what you are spending even if you spend a lot. There might be months when you expect a refund. You could track it from your statement. There are times when some debit you haven’t authorized might happen, from the issuing bank itself perhaps. These are things that can be identified only from your statement. Not all debits and credits come with notification alerts on the mobile. So, it pays to be vigilant and keep a check on what you are paying back to the credit card company as dues.
Planning personal finance is an important skill to develop. Your professional success, income and savings will all add up to naught if you are not careful about personal finance. The same works for everyone in your team irrespective of income levels. If you are looking for any help on managing your finances better or personal and or mentoring for your team do write to us at harish@harishrao.world to know how we can help you with it. We understand the difference the right mentoring and training can make to a person’s growth. We would love to work with you on this or any other coaching needs you may have!