Credit cards can be a boon and a bane at the same time.
If used carelessly, they can throw your finances off balance. But when used judiciously, a credit card can be an excellent source of instant credit while also offering a host of other important benefits. Regardless of whether you already have a credit card, or are planning to sign up for one, the following tips will help you leverage it to your best advantage.
1. Select wisely
Before opting for a credit card, understand everything about it and its reward features, assess your specific lifestyle and get a card that offers the most useful and relevant rewards/benefits. For instance, if your credit card offers fuel discounts and you do not own a car, this reward makes little sense for you. If you are a shopper, get a card that offers shopping-related rewards. If you fly frequently, opt for a credit card that has tie-ups with airlines and offers travel-associated rewards like air miles, lounge access, etc.
Similarly, if you dine out often, pick a card that offers attractive discounts on dining options.
It is also crucial to read the fine print and compare additional credit card benefits such as lost card liability, credit shield, extended warranties, purchase protection, insurance, holiday insurance benefits like rental car insurance, trip cancellation insurance, etc.
Shop around and compare before zeroing in on a credit card, so you can make the most of the associated rewards and benefits. This will be profitable for you and help you maximise your credit card transactions.
2. Earn while you spend
Several credit card companies offer reward points or cashback if the card is swiped to pay utility bills, restaurant bills, movie ticket purchases, and more. Some card issuers tie-up with retail chains for cashback arrangements. You can actually earn by spending through your credit card by keeping a track of deals like these. Earned reward points can be redeemed against gifts on the company’s reward catalogue – reward points can fetch you anything from something as basic as a gift voucher to something as huge as a car.
3. Use float smartly
By making your credit card purchases at the start of your billing cycle, you can leverage the interest-free period to the maximum extent. This means you get 55 days interest-free credit – 30 days float (maximum) plus the grace period than can go up to maximum 25 days.
For instance, in the case of a medical emergency, you can pay off hospital bills without spending out of your pocket. You can pay the bill through your credit card and immediately file for Mediclaim with the insurance company. By the time your credit card bill becomes due, you will be reimbursed by your insurer. In effect, you end up paying nothing out-of-pocket towards your hospital bills.
4. Pay in full
If you simply pay the minimum due amount and roll over the balance outstanding, you will be charged heavy interest on your credit card, anywhere between a fat 24% and 40% per annum. Additional spends do not enjoy a grace period and interest is charged right from the date of purchase.
Intelligent use of your credit card translates to paying off the entire outstanding amount at the end of your billing cycle, as far as possible. This makes your credit card work to your advantage, because at the end of the billing cycle, you are debt free. If the amount is on the higher side and you are unable to pay it off in full at one go, you can spread out several small payments throughout the month so as to complete the full payment before the due date. As an alternative, you can pay more than the minimum amount due, since this will lower the interest.
5. Pay on time
Credit cards involve exorbitant late payment fees. To avoid paying this, make timely payments. Since your credit score is closely tied to your repayment history, delayed payments will reflect poorly on your score. Further, if you have multiple credit cards, the outstanding across all cards will push up your debt drastically. Both situations lower your creditworthiness, making it difficult for you to get loans or any kind of credit in future.
It is, therefore, best for multiple card holders to consolidate all credit card debts at a lower interest rate and pay off all dues on all cards. If your different credit cards have different payment due dates, you could request the issuers to change the payment date such that all card payments fall due on the same day each month.
If feasible, it is also worth considering setting up ECS payments so the bill is automatically debited from your bank account on the given date.
6. Watch your credit score and credit utilization ratio
Your credit score (whether Transunion, Experian, or any other) is a key determinant of your creditworthiness (a good score is considered 750 and above). However, credit glitches like defaults and missed payments can pull your score down and lead to bad credit history. It is also good to keep a check on how much you spend despite having a high credit limit.
Your credit utilisation ratio (computed by dividing your total credit balance with the amount of credit available to you) also affects your overall credit health. A higher credit utilisation ratio means you are a risky borrower, which is not good for your credit health over time, even if your repayment history is otherwise strong.
A high credit utilisation ratio increases the likelihood for lenders to reject your loan or fresh credit card applications or charge you a higher rate of interest. A rule of thumb is to keep your credit utilisation ratio below 30% to keep your CIBIL score intact.
7. Get chip cards
With credit card frauds on the rise, it is advisable to opt for secure cards like the new-age chip and PIN cards, instead of the metallic strip ones. Chip and PIN cards are safer and less susceptible to use by fraudsters, as each transaction at each step requires a PIN. Most banks today automatically send the upgraded chip cards. If your bank has not yet done so, put in a formal written request for the same.
8. Claim benefits
Credit card companies roll out a range of offers year round. If you own a credit card and spot attractive offers such as bonus points for signing up, cash backs for certain category spends, etc. make it a point to claim these benefits to make the most of your card. You can contact your credit card issuing company and ask for the offer of your choice to be applied to your card, which the company will gladly do.
9. Get complimentary card benefits with your family members
As a couple, or if you have siblings, check the cards held by each. You can maximise each person’s credit card by balancing and complementing the diverse benefits of each card. This can be done by ensuring that different family members have different credit cards with varied benefits and reward schemes.
For instance, if one person has a card with exclusive shopping cash back offers, the other should ideally get another credit card with a different benefit such as more fuel points or flying miles.
10. Restrict the number of credit cards you own
Having too many credit cards not only increases the tendency to spend but ups the risk of loss or theft too.
If you absolutely must have more than one card, it is best to own two credit cards at the maximum – one for regular spending and the other for emergencies like medical expenditure and other such important, unavoidable expenses.
Credit card debt lowers your propensity to save and invest, thus adversely affecting your financial future.
On the other hand, smart use of your credit card not only offers several financial benefits but also helps you plan and optimise your resources a lot better.
Bearing the aforementioned key information in mind will help you understand, track, and manage your credit card wisely. At the end of the day, a credit card could be a great contemporary financial asset that can actually make you smile.
