Ten ways to use credit cards wisely
In the developed world, few people live their lives without credit cards. It's almost a necessary evil if you want to guarantee a good credit rating. Yet, even though these little pieces of plastic are part and parcel of our everyday lives, not everyone has learned how to use the cards to their advantage. Instead, too many get caught in a cycle of debt, and the banks get richer off the late payment and interest fees. To ensure you don't fall into the plastic trap, take note of the following titbits of advice and you'll be well on the way to taking better control of your finances.
1. Pay bills on time
Making sure the credit card bill is paid on time is the single most important wise thing to do with your card. Missing the deadline means hefty interest on the outstanding amount. If you're earning a steady income, it's best to set up a direct debit to ensure all bills are paid when they should. This will prevent incurring any late payments, especially if you're in the habit of forgetting to pay on time.
2. Pay more than the minimum
While every effort should be made to clear credit card debts at the end of each billing cycle, there are times when it's just not possible. In such cases, pay the most you can afford; at least a good few dollars over the minimum. If only the minimum is paid each month it will take years to pay off even the smallest of debts as you'll only ever be paying off the interest and none of the balance. Look at your last bill to see how much interest they added; sometimes the minimum doesn't even cover that amount. So check every month and pay double the minimum if you can. You'll be surprised how much quicker you'll pay off the outstanding balance.
3. Use rewards credit cards
Taking advantage of reward programs offered by many credit cards is one good way of using the card to your advantage. By combining purchases and monthly bills onto credit cards the rewards earned can be exchanged for air miles, cashback or discounts on affiliated goods and services. Just remember to go for a rewards program that is suited to your lifestyle - if you're not a big traveller, pass on the travel rewards cards and go for one that is linked to the big stores instead.
4. Seek our the best deals that suit your needs
Why pay for privileges when it can be avoided? Banks are tripping over themselves trying to get customers and as such, they try to outdo each other when it comes to giving special concessions. Many credit cards charge a yearly fee for the use of their cards, but there are others that will waive this fee. While this may be offset by some other benefits a card may provide, just shop around and find one that suits individual needs the most. Things to pay attention to when looking for a credit card would be no charge on application, no annual fee, the lowest interest rate possible, and reports to the major credit bureaus.
5. Negotiate lower rates
People with good credit card ratings tend to get some very appealing credit card offers in the mail from different banks offering a lower interest rate. Before rushing to close an old account, one with which a credit history has been established and helped to get that good credit rating in the first place, call the company whose card is being used and ask them to match the promotion. Call the customer service number on the back of the current credit card and explain that there is a better option available, and the current account may be closed. Believe it or not, many banks will lower interest rates to hold on to their good customers.
6. Watch out for hidden fees
Banks issuing credit cards are not allowed to hide any charges, by law. To get around this they print all this information in the small print on the back of the application form using legal terminology, which is almost never understood by the average customer. Many cards carry a number of fees which the innocent customer may not discover until they get stuck with paying them. Watch out for things like processing fees, late payment fees, transaction fees, going over the credit limit fees, balance transfer fees, overdraft protection fees and some even stick the customer with a fee if the payment is not received by a designated hour on the due date.
7. Think before transferring
The balance transfer was invented by credit card companies to get business. In an effort to gain customers they offer incentives - like a very low interest rate for a limited period of time. These reduced rates usually last six months or in some cases one year after the money has been transferred. After this time, the interest rate reverts to a much higher permanent rate. For this reason, it is important to keep an eye on the Annual Percentage Rate (APR), as this is what is going to count in the long run. Additionally, some banks charge a transfer fee, which is normally a percentage of the transferred balance; sometimes as much as 4%; that can be costly.
8. Limit the amount of cards
The number of cards each person has is really dependent upon the ability of the user to manage them. There is no magic number, although too many can damage your credit score, and add to your debts. For the responsible individual, keeping a few cards appears to be the norm, but try not to max out the cards as this can lead to a lower credit rating. It's advisable to keep the balances in the range of 30% to 50% of the allowable expenditure to appear healthy on credit checks.
9. Always keep accounts open
Be prudent about which credit cards to get, and once acquired, hold on to them. The age of the credit line makes up 15% of the credit score. Old cards show stability, especially if there is a good payment history involved. Most accounts stay on the credit report for around seven years, but lose their influence if they remain inactive for any length of time. While banks are not allowed to charge an inactivity fee on unused credit cards, they can close them if cards are not used. So rather than closing accounts, it is better to keep it open and use the card a few times a year to keep it active.
10. Emergency credit card use
It is a good idea to keep one credit card aside in case of emergencies. This way, if unexpected expenses arise which are totally out of your control, they can be dealt with quickly. However, fancy dresses or designer furniture on sale do not constitute emergencies!
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