Easy ways to manage your credit cards
Talk about credit cards and the reactions swing to the extreme ends — users either love them or hate them. For Steve, an administration assistant working in Dubai, his first credit card was a nightmare. “I applied for a credit card when I secured my first job in the emirates. The limit was more than twice my monthly pay cheque at that time, and I used it in full within months. Buying air tickets, gifts for self and family, sundry expenses, it was very convenient, but later I realised how hard it was to pay off the total amount. Paying just the minimum amount due each month wasn’t helping. I had to take a personal loan to close my credit card,” he says. Steve doesn’t use any credit card now.
On the other side of the spectrum are people like Jose who pay off total spends at the end of each month, without paying anything extra to the bank as interest or late fee. On the contrary, he uses the points accrued on his card for buying things for free. “On an average, I get Dh500-600 as cash back every month on my card. I will lose this if I use my debit card or cash.”
Come to think of it, this is how a credit card should be used. If you use it for almost all purchases, you have a record of your total spending at one place, which can be analysed on the go or at the end of the month when you receive your statement. It makes budgeting and accounting effortless. The icing on the cake are the freebies that you get in the form of rewards, points, or plain cash back.
But yes, there are steep downsides to credit card usage too. Irresponsible use can create massive debt that can potentially leave you bankrupt.
Let’s put things in perspective. For a purchase of say Dh5,000 on a credit card that charges 3 per cent interest rate on a monthly basis, you will take 72 months or six years to repay if you decide to pay just the minimum of 5 per cent each month (or Dh100, whichever is higher). In total, you will be paying the bank or credit card company Dh9,932 — Dh4,932 over and above what you owed.
So what can you do to make the best of your card without falling into its debt trap?
1Pay in full: Don’t test the depth of the card, keep the expenses limited to what you can repay at the end of the month. You can request the bank or card company to keep your credit limit low, if you need to put some checks and balances in place. A good payment history on your credit card will boost your credit score and, in turn, help you secure a loan, if needed, at a competitive rate.
2 Review spends and align them with the right kind of cards: Don’t just sign up for any cards. Understand your spends and look for a card that pays you for using it wisely. There are cards that give a cash back of up to 5 per cent on online and grocery spends. If you eat out frequently, look for cards that offer discounts on restaurants, etc. Choices are galore, you just have to find the one that suits your lifestyle.
3 Balance transfer: If you find yourself caught in big spends and are unable to repay in one go (which happens sometimes), commit to paying off the debt before you begin racking up new expenses. You can also choose to do a balance transfer to a new card that allows interest-free repayments for up to six months.
Spending and repaying wisely on a credit card allow money to make its way back into your pocket. Make your wallet a workhorse by carefully choosing a card that suits your needs, and you could get as much as 5 per cent of your household spends back to you.