Buying something expensive is no longer a problem. From that designer outfit to the most recent gizmos, you can get it all with a swipe of a credit card. But is it as simple as it sounds? Should you get carried away with those flashy ads and promos telling you how easy it is to buy stuff? Let's find out.
Whether dining at a restaurant, doing your grocery shopping or making the latest purchase, the most convenient mode of payment today is the credit card.
But wait a second before you swipe it -- do you know how to make the best use of your card? Which brings me to another question -- do you ever wonder why so many banks chase you with the offer of a free card? The answer is simple; it's the hefty interest rate (as much as 36 per cent per annum) that they charge when you don't pay your credit card bill on time. This interest is a lucrative source of revenue for them.
Understanding credit cards
A credit card is issued by a bank or a credit card company; it permits you to make purchases or pay your bills without using physical cash. The most important benefit is that you get a leeway of 20 to 50 days to make your payment after you use the card. Your bill is calculated from the date of billing. The time between each billing cycle -- which is the billing date between one month and the next -- is known as the 'interest free period'; however, if you do not pay your bill on time, you will be charged a hefty interest.
The second flexibility that you get is the choice to make the payment either at one go or on a monthly installment basis. Though this option becomes more feasible in terms of easy payment, watch out for the interest rate that can go up to 35-43 per cent annually. Do read 'Are you revolving your credit card?' to understand this better.
Ask yourself basic questions
~ Why do I need a credit card?
~ Is it because it is easier not to have to deal with cash or is it because everyone else has one?
You must realise there is no such thing as a 'free lunch'. Why would anyone offer free credit cards or even free add-on cards? Add-on cards are offered to you if you pay your bills regularly or have a good payment history. These cards can be in the name of your father/ mother/ spouse/ child; they can use the add-on card for making purchases. It functions exactly like your own credit card. Of course, the purchases are billed to the main credit card owner's account.
How to read your credit card statement
Whenever you swipe your card, it comes to you at a cost. You use the credit card to your advantage when you clear your bill within the 'interest free period', which is generally between 20-50 days (depending on the billing cycle).
Credit cards broadly fall under four categories -- regular, silver, gold, platinum. Each offers more facilities and each is more expensive.
Before you make up your mind to own one, do not forget to run a search on the maximum benefits you could avail of under a particular card. For instance, some credit cards offer discounts on airfares, retail shopping, etc.
So, while choosing the right card for yourself, know the costs involved and the benefits you can enjoy.
What else should you know
Once you start using your credit card, the card company sends you a monthly statement list of the purchases/ payments you have made with the card. You will have to pay this bill within a certain number of days. Don't ever forget that you will be charged a high interest rate if you don't pay your bill on time, that is before your due date.
Generally, a credit card finds a place in your wallet because of its 'free credit period', also known as the 'grace period'. This means you don't actually pay for something as soon as you buy it using your card. You pay for it when the credit card bill is delivered to you.
Don't borrow on your credit card! Here's why
The number of 'free' days that you get depends on the statement date and the transaction date. Generally, a time frame of 20 days is given, but if you plan purchases smartly, you may end up getting even 50 days of credit. This means that, if your billing date is today and you buy something tomorrow, you could get 50 days of credit. However, if your billing date is today, and you bought something using your credit card two days ago, you will only get a benefit of 22 days.
Make the best of your card
1. Pay your bill before the due date. If you are not able to do so, use the transfer balance facility through which you can transfer the balance amount on your bill to another credit card issuer and pay fewer charges.
2. Do not use the cash advance feature (where you can withdraw cash against your card just like an ATM) unless it is very crucial; the amount you withdraw does not qualify for an interest free period. The interest rate charged on such withdrawals ranges from 25-30 per cent per annum.
3. Know your credit card's billing cycle, the actual date of when it begins and ends. Make your purchases in such a manner that you get maximum free credit days.
4. Don't own multiple cards. Stick to a maximum of two cards. More than that and you will find it difficult to keep a track of how much money you are spending.
5. Always clear your credit card bills at least seven days before the due date to avoid being hit with a late fee.
6. Before you choose your credit card, take suggestions from your friends/ relatives.
7. Keep the receipts you get when you use your card; use these to check your bill when it is mailed to you.
8. Keep your card and your 16 digit credit card number confidential.
9. If you have more than one, carry only those that you think you will need when you leave the house.
10. Look out for cards that give you the highest free credit period.
Invitation to Get Ahead readers
Do you think you have useful tips on managing your credit cards, personal loans, auto loans, insurance-related matters, or stock market experience?
If yes, then write to us at getahead@rediff.co.in. Who knows, your experience may help somebody cope with her/his financial problems.
Earlier, Get Ahead reader Wing Commander Manoj G Puranik sent 'Credit cards: Remember these dos and don'ts' after reading '5 ways to make credit cards your best friends'.
"I'm jotting down some other suggestions from my own experience. I hope some of you would find them useful," he said in a mail he sent to us after reading the above article.
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