For those who could be misled by the title, this piece does not tell you to ‘never use a Credit Card’. Why would we? We know how helpful a credit card can be during times of emergency or to build your credit bureau score. Speaking of Credit Card, it is one of the convenient products of finance ever invented. Salaried professionals tend to make use of multiple credit cards or a supplementary credit card. This is fine, considering if your income allows you that leeway. The idea is to use a credit card wisely. Along with being financially stable, you need to possess, or build, self-discipline to be prompt with your credit card responsibilities. Remember that, if used smartly with care and prudence, a credit card can work wonders during a financial emergency. Before we look at situations where you should restrict the use of a credit card, let’s first understand what credit cards are, its features and how they work.
A financial product offered by banks or a credit card company, a credit card is a rectangular plastic card that houses your credit account information. In appearance, the card contains a magnetic strip on its back and your name, card number and card validity on the front. The credit card also contains an RFID chip that protects against identity theft. The card is issued to registered account holders and used to make purchases in a ‘swipe to pay’ mode. The purchase happens either at POS terminals or on e-commerce websites.
To be deemed credit worthy, to own a credit card, you need to have a stable income and a good credit bureau score. As a credit card is an unsecured type of credit, with no collateral or mortgage, your past repayment history is considered while approving your request for a new credit card. Upon being approved, the card issuer then creates a revolving credit account and grants you a line of credit. The credit is provided in the form of a credit limit. You then have to pay back the amount spent to the card issuer – within a fixed tenure along with interest.
How it Works?
When you make use of your credit card to make payments, the merchant validates your credit card account and asks the card issuer if the payment can be processed further, or not. If approved, then the payment goes through and the purchase is added to your credit account. Merchants pay a fee to credit card issuer to allow transactions at their respective terminals. The same fee acts as revenue for the credit card issuer. All these expenses, and purchases, are recorded by the card issuing authority. A billing cycle is a period set, within which all purchases, and payments, are accounted for and billed. You receive a credit card bill statement at the end of a credit cycle – usually between 25-30 days. A grace period of 15-25 days is added to the billing cycle. If the previous month’s balance payment is made before the end of the grace period, you incur no penalty. In case you fail to pay the total outstanding amount by the due-date, a minimum balance has to be paid to the credit card issuer. This amount is usually 5% of the total balance.
Benefits of a Credit Card
Credit cards offer many benefits to the card holder. Some of these are
- No need to carry cash – It is the perfect substitute to carrying hard cash
- Easy tracking – Use your card statements to keep track of expenses and monthly budgets
- Build your score – Be prompt in your card payments to maintain and build your credit score
8 Times to Refrain
Now let’s look at 8 situations when you can restrict the use of a credit card
A very common habit, which most people inculcate, is the urge to spend for every day commodities, via credit cards. While it is not bad to spend for daily essentials, but do so within the limit. Spend once for two weeks of supplies. Avoid crossing the monthly budget. For required daily expenses, you can use a debit card.
When you already own multiple credit cards, keep in mind your billing cycle and the due-dates. Use the card which has a later due-date. This habit will give you a higher credit period and will not hit your budget.
Simply stop using your credit card when you are closer to your credit limit. This is beneficial in keeping your credit score healthy.
Do not withdraw cash from an ATM terminal using your credit card. Not only are the interest rates charged on the cash advances quite high, but they are also charged from day one itself – at a flat interest rate.
Refrain from jumping on to the discount bandwagon. There is a chance you will exceed your budget and spend more than you can afford. Be wise to not give in to the lure of discounts, and purchase products only when it’s necessary. Being a compulsive spender can lead you to accumulate substantial credit card debt.
Online shopping is in vogue, and helps us to shop at our fingertips. Although it is a convenient way to shop, you must do so only on secured websites. Sharing your personal and credit card information could be dangerous if fallen into the hands of hackers or identity thieves.
Credit card issuers attract customers by means of various offers and high reward points on purchases. Although accumulating reward points is good, spending only for this reason is unhealthy. Will every transaction the reward points might increase, but will also leave you with a hefty bill.
Upon using your credit card abroad, to make transactions, you are charged with a fee. The exchange rate also changes which further determine the amount you are charged on your card.