Credit cards can be a very useful tool if used correctly and responsibly. They can save you hundreds and thousands of dollars in interest on your borrowing, make you money when in use, protect your belongings when travelling, and improve your credit rating. Prospective lenders will also be more liable to lend you money at lower interest rates. This article narrows down to a few tips for some of the forgotten benefits and warnings.
The strength of plastic
Credit cards are the most versatile option in your back pocket and prove very handy when used in the right situation. There are a number of factors that are of benefit to the consumer, such as the borrowing facility they provide and the level of consumer protection against fraud or fake goods or services. You can save money when shopping on certain purchases where the provider has a loyalty partnership with the merchant, not forgetting air miles and other perks for example. Although cautious, acting irresponsibly can lead you up a path of expensive debt and a beaten-up credit rating which will affect your chances of securing other forms of credit, such as additional credit cards, mortgages or even online loans.
Tips to maximise your credit card
Enforce a direct debit
We all need to pay our bills on time, whether it’s for rent, your mobile phone or a utility bill, a credit card is no different. If you don’t make your repayments on time, you’ll be subject to late payment fees and will most likely lose any introductory or balance transfer deals. In the avoidance of doubt or human error, set up a direct debit, you can do this via your online banking or over the phone. Depending on your circumstances, you’ll need to decide which type of payment is comfortable and suited to your situation. The options are below:
Regardless of the card type, 0% balance transfer, 0% on purchases, cash-back, reward or credit builder you should set up a direct debit for at least the minimum repayment, which can be as low as 1% interest.
If you don’t have a 0% interest deal on your card, you should really pay off your balance in full each month. This does wonder for your credit score and means you won’t be paying any interest because credit card providers allow a 25-day window to pay back your monthly spending before your standard interest rate kicks in. So if you purchase something on the 1st of the month, you have 56 days interest-free (in a 31-day month). Buy something on the 31st, and you’ll only have 25 days interest-free. There are a few isolated exceptions to this rule such as if you withdraw cash from an ATM or pay for goods or services that are categorised within withdrawing cash; for example buying foreign currency or gambling.
A fixed amount.
If your primary reason for getting a credit card is to clear the debt, whether it’s an existing debit or making a sizable purchase, it’s wise to set up a direct debit to clear a fixed amount each month. There are a couple of options when it comes to the set amount. If you wish to clear the debt entirely within the 0% interest period, then divide your debt by the number of months the deal is in place and set up the direct debit for that monthly amount. As an example, if you purchased something for $2,000 and you have interest-free purchases for 15 months, you should set up a monthly direct debit of $133.33. This will ensure you pay off the debt and not be subject to any interest during this period.
Paying off your debt in fixed amounts as opposed to the minimum amount is always advisable because when credit card providers calculate your minimum repayment amount, they run the numbers as a percentage of your credit card balance, so this results in your minimum repayment shrinking as you slowly pay off the balance thus resulting in it taking longer to pay off the debt. For example, if you carry a balance of $2,000 on a card and the set minimum repayment of 2.25%, it will take you in total 11 years and 9 months to pay off the debt. If you were to assign a repayment amount of $50 a month, you would clear the debt in just over a couple of years.
Avoid cash withdrawals
Always remember that when using a credit card to withdraw cash, interest is charged immediately so you’ll end up paying more for the cash you receive. It’s not just ATMs that credit card providers charge interest on using, all of the below are considered the same type of transaction, meaning extra fees and interest you need to avoid:
- Currency spending – If you purchase your holiday spending money on your credit card, it will incur the same charges as taking money out from the wall. It’s more advisable to take a credit card more suited to spending abroad.
- Traveller’s cheques – It’s classified as cash withdrawals, so if you purchase them on a credit card they will carry the same charges and interest.
- Electronic transfers – Unless you have a 0% money transfer deal on your credit card, you will pay interest if you move money from one account to another.
- Gambling – If you intend to place bets using a credit card either online or at your local bookmakers, it’s classified as a ‘cash advance so you’ll pay interest and fee’s here too.
Why maintaining a buffer is important
Most of us will suffer some form of financial stress at any given period of our lives. One of the most common triggers of financial stress lenders sees are customers hitting their maximum limit with credit cards. This can pose a problem if you want to apply for another form of credit, like an additional credit card, or short-term loan, or a car loan. As a rule of thumb, try to stay below the 70% credit utilisation rate available to you. Not only will this help in your efforts to secure additional credit in the future, but it will also provide you with an added layer of security if any emergency purchases arise.
Get rid of any unused or old credit cards
If you’re not using it, don’t keep it and cancel it. Having too many credit card accounts open acts negatively on your credit rating because lenders don’t like seeing you have too much credit at your disposal. The concern is that you won’t exercise the credit they provide, which in turn is bad business for them. Or being tempted by an attractive line of credit, you might go on an unforeseen spending spree one day and not be able to pay off your balance. Either way, don’t tempt fate and cancel the cards you don’t use. It’s important to cut the cards up into little pieces so you don’t fall afoul of identity theft.
Look at your bills thoroughly
Always stay vigilant and protect yourself from identity theft or fraud by reviewing your statements each month for any inconsistencies. Look out for:
- Errors – are there any charges that look odd to you or far higher than they should be? If so, call the merchant immediately to query them.
- Thieves – are there transactions on your statement that don’t look familiar? If there are you need to call your credit card provider and report them immediately.
- Outdated subscriptions – are there any regular payments that are going out for things you no longer need or use? If the answer is yes, you’ll need to cancel the goods or services with the business directly, as your credit card provider doesn’t have the authority to do so.
- Interest rates – double check the interest to which you’ve been charged. You might have taken the credit card out due to its attractive introductory offer but if that’s now lapsed you should seek alternative cards to avoid excessive interest charges.
Loyalty doesn’t matter
Credit card providers don’t care about personality. It may sound fickle, but they are designed to make money from you, they wouldn’t be the popular product that exists today if they didn’t. Therefore, if you’ve had a card for a couple of years, you’re probably not getting the best deal for your circumstances, and it may be time to switch the balance to a new provider. If you’ve been sensible and made good use of your card features and made payments on time, this will have improved your credit rating, meaning you may be eligible for an upgrade with finer perks, better cashback rewards, and lower interest rates.