5 ways to stay on top of your credit card game
The word “debt” usually evokes disturbing connotations such as “trap”, “burden” and “default”. This is why many of us view debt as something to avoid. However, the word “credit” does not carry such a burden although it expresses a similar financial concept. The difference is simply a matter of perspective. And with the right perspective, debt can be very beneficial.
We’ve all heard the stories of the infamous debt trap or maybe even experienced it. In such situations, we tend to blame credit instruments like digital loans or credit cards. And while some predatory credit practices are certainly harmful, the instrument itself is not the problem. It is only a tool and its impact depends on how it is used.
Going into debt using instruments like credit cards responsibly can lead to a number of benefits. This will help you establish a healthy credit score, which will provide you with favorable terms when you need to take on more debt in the future. It can help you plan out-of-budget expenses and ease financial pressure in times of lean cash flow. If used effectively, it can lead to savings and rewards.
But to do that, you need to take a planned approach to using credit cards. Here are five ways to be on top of your credit card game.
- Regularly pay your balance in full
Every time you pay for something with your credit card, you’re essentially taking out a loan, and that’s credit card 101. But it’s no ordinary loan. It usually comes with an interest-free period, after which interest is charged daily. In annual terms, the interest rate can go up to 48%, or 4% on a monthly basis. That’s why carrying over your credit card balance can quickly snowball into serious debt. Consistently paying the minimum amount due is one of the easiest ways to get stuck in a debt trap.
Paying your balance in full before the due date ensures you get an interest-free loan every time. It also ensures that your credit history shows that you are disciplined and can rely on higher loan amounts, which helps when you want to take out a home loan or want to increase the credit card limit. An easy way to make sure you don’t miss any refunds without having to track them is to set up an automatic payment.
- Keep your credit utilization rate low
Although your credit limit will vary depending on your financial profile, it’s usually quite a large amount. This doesn’t mean you have to spend beyond your means. Your credit utilization rate is the amount of credit you are using against your credit limit. Maximizing your credit limit regularly indicates that you are highly dependent on credit. On the other hand, low credit usage shows that you are responsible for your credit usage. This means planning or budgeting for your credit card usage. You can do this by limiting the amount or type of purchases you make with your credit card.
- Maximize reward programs
Credit cards come in all shapes and sizes, metaphorically. Some are geared toward lifestyle spending, others focus on travel, and some cater to specific brands. Each of them has reward programs aligned with the type of spend specified. Choose credit cards that match your spending habits and stick to them for those specific purchases. This ensures that you don’t abuse credit while maximizing your rewards. These rewards can typically be used for paying credit card bills or earning cashback, resulting in significant savings when used effectively.
- Maximize your interest-free period
The ideal number of credit cards does not exist, it depends on your financial profile and how you use them. Suppose you have two credit cards each with a one month billing cycle. You can use card A from the 1st to the 15th of the month and card B from the 16th to the end of the month. In this way, you guarantee less credit use. At the same time, the staggered billing cycle reduces the pressure on your cash flow.
That being said, you shouldn’t have so many cards that managing your debt becomes problematic. You might have other financial obligations, EMIs, or investments that regularly draw money from your bank account. It’s important to remember that ultimately you need to have enough money in the bank to pay your credit card bills on time.
- Avoid cash advances on your credit card
A cash advance is when you use your credit card to get cash. It’s basically like using your credit card at an ATM. Using a debit card at an ATM takes money out of your bank balance. But using a credit card at an ATM involves borrowing money against your credit limit. Although this doesn’t usually happen, you might feel the need to do so in cases where you need to pay cash and don’t have enough balance.
But why mention this specific case? Because it’s one of the most expensive transactions you can make with your credit card. Not only do credit card providers charge higher interest rates on cash advances, but the usual interest-free period also does not apply, interest begins to accrue daily the very next day. This usually comes with cash advance fees and ATM usage fees.
All credit cards come with a lot of fine print, and you should be aware of all applicable fees and charges. While by no means an exhaustive list, these five safeguards should help you use credit cards responsibly and make your debt work for you.
The opinions expressed above are those of the author.
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