When you apply for a credit card, all you look for is the benefits and privileges that a card offers but you must pay equal importance to the fees and charges that it entails so that you can manage each credit card wisely. So, here we will talk about a few ways how you can make credit cards work in favor of you rather than against you.
- Pay total outstanding amount every month
This is a basic rule to follow. A majority of credit card users in India find the feature of paying the minimum amount as a blessing whereas this is the first thing that pulls you into debt. You must always pay the dues in full every month. When you pay only the minimum amount due, the balance gets rolled over to the next statement. As long as an outstanding amount stays in your credit card account, it attracts interest on daily basis. And credit card interest rates (APR) are the highest ranging from 20% to 45% annually. So, always pay your credit card dues in full to avoid heavy interest.
- Always pay on time
Another important point to consider is that credit card comes with a due date and you should be serious about it. When you do not pay your bills on time, a late payment fee will be charged. The fee depends upon the total outstanding amount. For example, if the total outstanding is between ₹ 5,000 and ₹ 7,000, you would be charged ₹ 300 as late fee but if it exceeds ₹ 7,000, then you would have to pay ₹ 500. Also, interest on credit card is charged on daily basis so the total interest outgo would accumulate to form a considerable amount. To avoid late payments, you can set payment reminders on your phone. You can also set up standing instructions on your savings or current account to avoid missing payments.
- Know your credit limits
Your credit utilization ratio makes up about 30 percent of your credit score. It is the ratio of available credit to the total outstanding amount on the card. For instance, if you have available limit of ₹ 15,000 on your card and the total outstanding amount is ₹ 7,000, your credit utilization ratio would be 46.67%. Lower the ratio, higher will be your credit score.
You should be aware of the credit limit on each of your credit cards and use them accordingly so that a fair utilization limit can be maintained. It is also important to control your spending so that the bill generated at the end of the cycle does not give you a shock. Set a personal spending threshold; once you reach it do not use that card again for the month. And if you think you cannot control your spending, ask the bank to reduce your limit. This way you can avoid overspending.
- Strategize your spending
Credit cards come with varied benefits and you can make the most of these benefits by choosing the right credit card every time you go out shopping. If you own a card that offers extra privileges on flight bookings, keep the limits free on the card for such expenses. Use a shopping card at a departmental store if it offers extra perks on the same. Strategizing your spending will help you earn more rewards and save big. Experts say that those who are really happy with their credit cards are the ones who have mastered the art of utilizing rewards and spend-based benefits.
- Keep credit card for big expenses
A lot of people complain about credit card debt just coming from nowhere. This happens when you start using your credit card for every single expense- no matter how small they are. At the time of making small purchases, you would not worry as it is just a small sum of money but the real problem starts when all the small expenses add up to form of big credit card bill.
The best way to solve this problem is to use your credit card only for bigger expenses- purchases that you would like to convert into EMIs and pay off over a few months. You should not take up debt for smaller expenses; use your debit card instead. Save up small amounts for a few months so that you have enough back up to cover such small expenses in future. Also, if you think you cannot afford more EMIs on the same card, avoid making new purchases on it.
The Bottom Line
There is a simple rule to follow with your credit cards- keep them to compliment your budget; do not add your credit limit at the time of budgeting your expenses. Doing this requires a lot of discipline especially for someone who has been spending recklessly on credit cards. Start with making a written budget relating to credit cards which will include how much you plan on spending on each of your cards. Strictly follow this budget. A good way to keep yourself on track is to log into your account once or twice a week and check how much you have spent out of your budget. Seeing the expenses on screen will surely have a bigger impact and encourage you to hold back on unnecessary expenditure.
Credit cards are meant to help you buy things you have always wanted and pay for them in installments. So, it is your responsibility to watch over the usage so that it does not become a threat to your financial situation.
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