We’ve all heard the admonishments: “Never buy anything with credit; you’re just spending money you don’t have.” “Credit card debt is bad debt and should be avoided.” “The credit industry is one big money-making scam. Always pay with cash.” While this advice is good-intentioned, it’s not actually very good.
There is some truth to the statements above; credit card debt is considered bad debt since it’s a high-interest debt used mostly to purchase depreciating assets. And many fee-harvesting credit cards do exist, though these have decreased in number in 2009.. Paying with cash is a good idea for many purchases, but it’s not always the most advantageous strategy.
So how can you make the most of your credit cards? First, know how to use them right. Use reward cards to earn cash back for daily purchases. Try not to carry a balance from one month to the next. If you do carry a balance, it will be subject to interest – some of the highest rates in the financial industry. If you must make a big purchase, use a 0% interest card that allows you a year or less (ICICI BANK is the most common) to pay back the balance before interest is applied. Any interest you pay on depreciating assets like clothing and food is money down the drain. So definitely do not carry the balance forward on such purchases.
Second, know how to pay for your cards. It’s imperative to make your payments on time. Right now, lenders have plenty of problems of their own. You’re not likely to find much sympathy if you make a late payment. In fact, good customers who are late by a single day find themselves slapped with upto 30% penalty interest on their card balances. If you think you’re going to be late on a payment, contact your card company and see if they’ll work with you. Better yet, make credit purchases in affordable moderation and avoid this situation altogether. When it comes time to pay off your cards, tackle the high-interest ones first. You’ll save a lot of money in the long-run.
Credit cards are a convenience, not a right. Use them wisely, and you won’t struggle with the burden of debt that too many Americans have accumulated, but we in India have by and large fallen into that trap. But younger,more inexperienced spenders do seem to be having a problem,what with the IT slowdown.
Why Minimum Monthly Payments Will Really Hurt You
Sometimes credit cards make life a little too easy. How is that possible? By allowing us to make purchases we really can’t afford, and then giving us an unlimited amount of time to pay off the debt. It sounds great in theory, but ask a card holder who’s been paying off the same debt for years. They’ll tell you that extending your repayment isn’t as easy as it sounds. Our Hindi movies are replete with the village moneylender carrying on a loan through generations! It’s no different today;only the structures and language have changed!
That is because of the amount of interest you accrue when you stretch out your debt over a long period of time. In fact, credit card companies count on card holders with revolving debt (debt that rolls over from one month to the next). Those consumers pay the fees and interest rates that keep the card companies so profitable.
As a card holder, minimum monthly payments are your enemy. Consider this: a fairly typical household with Rs. 100, 000 of credit card debt, making minimum monthly payments, would take over ten years to pay off their balance – and that’s with a decent interest rate! It’s nearly impossible to make a dent in your debt by making minimum payments.
Some card holders lament the fact that their debt actually increases each month when they make minimum monthly payments. I’ve seen this firsthand; fees for carrying a balance, combined with interest, can really overcome a minimum payment. Always paid three to four times the minimum monthly payment in order to stay ahead of the debt.
Given the fact that the credit card explosion in India is of such recent origin, it is really important that there be a law that would require credit card companies to educate their consumers about the consequences of minimum monthly payments. This would be a huge boon to card holders, as it would illustrate just how long it takes to pay off a balance with minimum payments. Most card holders carry a balance from month to month, and a significant percentage of them make only the minimum required payment. Many simply don’t realize what a poor choice this is.
The best way to handle credit card debt is to prevent it. Pay off your balance in full each month. But if an emergency or special event has left you with a heap of credit card debt, there are steps you can take to reduce it quickly. Remember: the longer you take to pay off an interest-bearing balance, the more you will ultimately pay.
To get serious about paying off your credit card balance, pay triple or quadruple the required amount each month. If you get a work bonus or a tax refund, use some of it to pay down your balances. Transfer high-interest balances to 0% interest credit cards to make your monthly payments mean something. Just be sure to pay off the balance in full before that 0% interest period ends.
Minimum monthly payments might seem cheap at first, but they come with a hefty price tag. Get your debt paid off as quickly as possible to avoid throwing money away on fees, penalties, and interest.
Be Very Careful and Conservative With Your First Credit Card
It can be so easy to think of the funds available to you through your credit card as free money, especially when it’s your first card. You never actually see any cash—you just hand the cashier this piece of plastic that some nice company sent you in the mail, and the cashier gives you your purchases. You don’t see the cash until it starts disappearing from your savings, after you’ve maxed your credit card out and are buried up to your neck in late fees and penalties.
That’s why it’s so important that you establish disciplined credit card practices from the first day you get your card. Responsible credit card use can build you a great credit history and help you toward a great future, but reckless credit card use can throw your finances off-course for years. Start on the right foot with your credit card, and side-step the worries. The most valuable piece of advice you can when it comes to responsible credit card use is so simple that many people overlook it: never carry a balance. Especially when you’ve only just started using your credit card, you should never make purchases with it that you don’t already have the money to pay off. This might seem counterintuitive. If you already had the money, why would you be using a credit card? Learning to use your credit card intelligently when you first start out requires a little re-thinking of what your credit card can provide you. You should think of it as a means to build good credit, possibly get rewards points, and a source of funds for extreme emergencies—and that’s all.
Most credit cards available to first-time users don’t have the best interest rates, so overextending your budget on your first card is never a good financial move. . Don’t get caught up in the cycle of bad debt. Keep careful track of your credit card expenses, only using it when you are certain that you will have the money to pay your balance at the end of the month.
It might seem difficult, but a little discipline will go a long way toward protecting your financial future. Then, if you absolutely have to, carrying a balance won’t be as costly. Not only that, but you will be teaching yourself highly valuable budgeting skills that will help improve your quality of life, for the rest of your life. So which sounds better—budgeting carefully, or that great new flat-screen tv that you wouldn’t be able to afford without your credit card?
At Least 10 Ways to Save Money on Credit Cards
10. Have at Least One Credit Card for Emergencies – While we highly recommend having a rainy day fund for emergencies rather than relying strictly on credit cards, having a credit card with a low interest rate “just incase” is a good idea.
9. Rewards are not so Rewarding – Rewards can be a good thing, but only if used correctly. Rewards cards typically have a higher interest rate than regular credit cards, with the value of the rewards justifying the extra expense. The rewards are not usually as valuable as you may think. Typically the value of the reward is around 1 cent per dollar charged and often the rewards expire at the end of the year if you don’t use them. If you pay off your balance in full each month and charge a lot they can be worth while, otherwise you’re better off with a non-rewards card.
8. Have Two Credit Cards – If you do plan to take advantage of rewards, we recommend you carry two credit cards. The rewards card for making your daily expenses that you will pay off in full each month and a second card with the lowest possible interest rate to cover any emergency expenses when you won’t be able to pay off the balance in full by the end of the month.
7. Shop Around – Do the research for yourself. You’ll get the best deal by shopping around.
6. Read the Terms – The terms and conditions cut through the hype and reveal the true terms of the credit card such as what happens when you miss a payment and what you’re really getting from the rewards. Most terms are not that long, usually around one full page, it’s worth your time to read them.
5. Ask for a Better Rate – Once you have been a credit card customer for a few months call them and ask for a better rate. They won’t laugh at you, they get hundreds of these calls every day and if you’ve been a good customer it usually will work. Credit card companies work hard to obtain you as a customer and they will work hard to retain you.
4. Pay Off Full Balance Every Month – All credit cards have high interest rates compared to other types of loans. You should never plan to carry a balance on a credit card. If you must make a large purchase that you do not have the money for at the time, obtain a loan or a revolving line of credit from your bank. You will save a bundle on interest rates.
3. Work with Retention Department – If you ever feel you are being treated unjustly by your credit card issuer, a simple threat to leave will get you transferred to the retention department. This department will be MUCH more helpful to you and will usually do whatever it takes within reason to get you to stay.
2. Do not get a Cash Advance – This is the second worse thing you can do with a credit card, short of missing a payment is getting a cash advance. The cash advances usually come with a very high interest rate. What makes it worse is the fact that with most companies this higher rate credit will not get paid off first, or even in the order that you took it out. They will apply your payments towards all the lower rate purchases and will only begin paying off your high interest cash advance will all other items on that credit card have been paid off.
1. Never, EVER Miss a Payment – This is the absolute worse thing you can do with a credit card. Not only will you incur a late fee, but your interest rate will also skyrocket. In addition, it also makes you less likely to get approved for future credit.