The reason why credit cards are so popular is because of the umpteen advantages they offer to the user. Loaded with several features which save you money, they allow you luxuries in the best of hotels, restaurants and spas. They’re also an ergonomic means of payment and come in handy in times of emergencies.
But what accompanies these many pros of credit cards is the baggage of timely payments. Credit relationships are built on trust and faith which companies place in customers after determining their creditworthiness. While they’re lending you money for your purchases, they’ll also be keeping a hawk’s eye on your usage history, trying to look for signs of reckless use of their funds.
Lastly, even if you’re reckless in usage, one place a person just cannot expect laxity in, is repayment of credit card bills. This is perhaps the most important determinant of your creditworthiness in the eyes of the creditor. Late payments have both long and short term ramifications which can cause considerable damage to your credit score, and make it difficult for you to obtain credit easily, and at competitive rates.
Since credit cards bring (purchasing) power, they also demand responsibility and awareness. So as not to go overboard with the card swiping and all, we’ve drafted a list of some crucial points on how to use a credit card, which you should keep in the back of your mind for better usage and rewards.
1. Do It With(in) Grace
Familiarising yourself with the bill generation cycle of your credit card provider can earn you lots of benefits in terms of savings. This is because you can time your purchases according to the bill generation cycle, and liberally use the interest-free period.
Confused? Here’s a brief breakdown: The card company generates a bill at a particular date. Then there’s the due date to pay that bill. Generally 20-25 days post the bill generation date. These 20-25 days, along with the billing period of about 30 or so days, constitutes the grace period. Purchases in the grace period do not attract any interest or penalty as long as your balance is paid in full, and you can make the most of it if your purchase clock is set with the bill generation cycle.
2. IOU? More Like EMI
We all make huge purchases sometimes, maybe because of a necessity, or just indulgence. But if the spend is huge enough, and you hadn’t factored in the payment with your earnings beforehand, you can always use the EMI option to pay your credit card bills.
EMI payment options are generally available for 3-18 months, and one of the compromises that you’ll have to make is the reduction of your credit limit by the amount of your EMI. Looking on the brighter side, your EMI could most probably be interest-free, or the bank might levy and interest rate, which is lower than credit card rates.
3. Redeem Your Way To Benefits
One of the features almost all credit cards have is the point redemption system. Spends above a particular amount earn the customer some points. These points can later be redeemed in exchange of products or services.
Be in touch with the reward programme run by your credit card company. Most of the users usually forget about the reward points they’ve accumulated, which is unfortunate. They can open doors to enticing discounts, offers and some amazing vouchers as well. You can even ask, if your bank allows, to adjust these redemption points with your outstanding credit card bill.
4. Pay Your Dues On Time
These four words constitute a cardinal tenet of maintaining good financial health. As elaborated above as well, paying your dues on time is the first and foremost responsibility of any diligent credit card user. Not doing so only lands you in deep trouble.
Non-payment of dues within the stipulated time attracts heavy penalties levied each day. Moreover, this has a huge impact on your credit score. The credit score determines how good you are with your credit. Here’s how to check your credit score. Now, if you’re not punctual with your payments, you can notice the credit score plummeting at a quick pace.
5. Get The Right Fit
There’s a wide variety of credit cards on offer out there. Why is that so? The reason is that credit card companies take out different credit cards to be used for different purposes. Yes, the basic purpose is a purchase, but credit cards are differentiated on the basis of what’s being purchased.
If you’re a frequent flier, using a dining credit card for your international flights will make you miss out on great deals and savings. Or, for instance, if you’re an epicurean, using a travel card is not the most prudent of options.
So, you’ve got to be aware of what your needs are, and make decisions regarding your credit card on the basis of these needs.
6. Don’t Close Cards Randomly
Rachel Greene in Friends did it. It is the widely prescribed detox therapy for shopaholics in pop culture. Yes, we’re talking about cutting down on your purchases by literally cutting your credit cards. Don’t.
The reason why you shouldn’t just close your credit cards randomly is that it jolts your utilisation ratio. The ratio is calculated the total credit limit utilised against total credit available. So, if you have 4 cards of a credit limit of 50,000 each, the credit available is 200,000. And if your purchases are just 100,000, then your utilisation ratio’s 50%.
Suppose you abruptly closed your account at one credit card company. Your utilisation ratio jumps to 66%, without an increase in actual expenditure. This adversely affects your credit score, so try avoiding it.
7. Be Aware Of Your Usage
The most general, but the most important. Tips won’t work unless you make changes in your understanding of how this system works. You’ll have to keep an eye on your purchases, and avoid utilising all of your credit limit in one go. If you’re finding it tough to make voluntary changes, instruct your bank to impose a limit on your expenditure.
There’s a reason why many advise us against using a credit card. This is not because credit cards are harmful, but that we can get carried away in the rush of financial freedom and support. In order to avoid dire situations, it is imperative to have certain ground rules for credit card usage.