Credit card spending: Is your plastic really that fantastic?

Every day we pull out a piece of plastic and pay for food, drinks and shopping without even thinking twice about it. Nowadays, it’s more likely that we pull out a phone or use our smart watch to pay – but they are still linked to our credit card. And a surprising number of people don’t fully understand how interest on their credit card is charged and the associated fees. Here are some of the basic details you need to know.

Interest rates

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Do you know how much interest your credit card company charges you? Monthly interest rates on credit cards in the UAE typically range from two per cent to four per cent, translating to annual rates of between 24 per cent and 48 per cent. That’s pretty high when you consider the top rate of interest you’d earn on a UAE savings account is about five per cent.

One misconception is when you actually pay interest on your card. In an ideal world, you will pay off your balance in full each month. That way, you avoid paying any interest. But we are not all so financially disciplined.

Sometimes, you can’t pay the full amount and instead end up paying half of it or just the minimum balance. That’s often when the confusion begins as some people think if they pay the minimum amount due, then they won’t be charged interest. Sadly, that’s not the case.

Grace periods

A grace period is the time between your statement date and the due date of your payment, which is normally about 21 to 25 days. It does vary among credit card issuers. This grace period applies as long as you pay your full statement balance on time. But if you don’t pay the full amount you are charged interest, which is often backdated to the date of the original purchase.

Cash advances

It’s hard to think of a scenario where taking a cash advance on your credit card is a good idea. You will be charged interest the second you take the cash as grace periods don’t apply to cash advances. Plus, you are usually charged a higher interest rate than for normal spending on the card. On top of that, you will pay a fee for the cash advance. Instead, consider a small personal loan or overdraft with lower rates. However, some banks are improving their offerings for those who really need the cash – Wio bank lets you borrow from your credit limit with Easy Cash, and charges one dirham per day for every Dh1,000 borrowed.

Checking statements

Be honest, how often do you look at your credit card statement in detail? Most people dread it coming and quickly move onto something else. But it could pay to go through it properly. Sometimes, transactions get added by mistake or the card has been used fraudulently. Look at what you paid for and make sure you recognise all the merchants. You can also see any penalties and fees you may have incurred, which should encourage you to manage the card better.

The wrong card

There are hundreds of credit cards out there, all offering different perks. How do you know you are using the right one? Research by comparison site Daleel found that only half of the people they surveyed are confident they have the right credit card for them. A look at Emirates NBD’s website will show you all sorts of card partners including Emirates, Etihad, Dnata, Noon, Lulu, Emaar, Marriott Bonvoy and one called Webshopper. They all offer cashback, air miles or discounts. To choose the right card, you have to match your spending habits with cards that reward those categories. For example, some cards reward certain types of purchases like online shopping, so make sure you only take out this card if you actually do a lot of your shopping online. The same is true for the airlines’ cards.

Foreign transaction fees

Some cards may say they are ideal for travel but then charge you 2-3 per cent per transaction abroad. Look for cards that say “no FX fees” or “zero per cent foreign transaction fees” if you travel often. But even if they don’t charge a fee, you may not always get the best currency conversion rates. When you get the option, always pay in the local currency as the bank will use the more competitive conversion rates used by Visa and Mastercard.

Promotions

We all love a good promotion or discount. For credit cards, it could be “No Annual Fee”. But this might only be for the first year, and then a huge fee kicks in after 12 months. Zero per cent interest deals are always worth double checking. Are they really not charging any interest? Once the introductory offer ends you may then be charged interest if you don’t pay off the full balance.

T&Cs

It would be unrealistic to advise people to read all the literature that comes with a credit card – the small print. But you should get a Key Facts or an ‘At a Glance’ summary from your bank, while others are turning to videos and other formats to clearly explain the terms and conditions. The more time you can spend reading them, the more informed a decision you can make. For example, while researching this article I browsed a lot of credit cards and landed on the RAKBank World credit card which offers up to 10 per cent on a variety of spending which sounds very generous. But after digging around, I saw that to start earning cashback you need to spend a minimum of Dh10,000 per month on your World Credit Card. That amount might not suit everybody so this is when reading as much of the small print as possible really helps.