The usage of credit cards paved the way for a convenient lifestyle. It made people financially independent, especially to young adults. Because of the many options available to those who want to borrow funds, it became the most popular payment method.
However, using the credit card irresponsibly will lead to a financial burden.
If you don’t have a credit card yet or you plan to get one, here are the things you must understand about credit cards and why we must use these wisely.
#1 Easy to Bury Yourself Into a Debt Hole
The golden rule with using a credit card is to swipe only what you can afford to pay realistically.
You may ask: “If I can pay in cash, why should I use a credit card?”
Because credit cards have various benefits your debit card will not have such as cashback, discounts, and redeemable points.
But take note that these benefits usually have a minimum spend requirements. So manage your spending well.
If you are an impulsive buyer, a credit card is a perfect tool to dig a debt hole.
A credit card comes with a credit limit. If it is your first time, you can access more funds and will make it easy to spend it over. That’s if you lack discipline in using it.
To avoid that debt hole and the possibility of damaging your credit record or score, it is better that you only spend what you can only afford to pay back monthly. If you don’t have enough budget, it may help you stay on track, just do not accumulate too much debt.
#2 Balances and a Heavy Interest Charges
If you pay your bill on time, there will be no interest rate. However, if you missed your deadline, there will be a high interest rate.
This part is where others suffered from. It is when you failed to pay a due and the balance is carried over to the next month. You will pay the amount of interest. The said interest rates vary depending on what card and your creditworthiness. But it will highly ruin your financial aspect.
In case you carry a high balance and you have a hard time paying it down, the option may consider is to apply for a balance transfer. Some balance transfer cards are offering a 0% interest introductory rate between nine to 21 months. At the said time, you won’t pay interest on your balance.
If you don’t want to pay interest, pay your credit card balance statement in full and on-time monthly.
#3 Multiple Credit Cards Can Damage Your Credit
Some apply for another credit card to cope with financial responsibilities. However, it will damage your credit. Why? Lenders or any financial facilities can check any person’s credit report. What they can see is your payment history, your current amount you owed, length of the history, new credit, and the types of credit used.
This is because credit card companies and lenders are required by the law to report your credit history to the credit bureaus
Bear in mind that there’s a limit to how many cards you can open at a certain period of time. Whenever you apply for a new loan, lenders such as cashmart.sg will open your credit history and will evaluate your creditworthiness. It will give a bad impression to lenders as well. It will be suspicious of them if you need to access a lot of credit. Some applications get rejected because of this.
#4 Too Much Usage of the Credit Limit
Credit cards do have a card utilization ratio. It affects your credit score negatively if the credit card utilization ratio is high.
Credit card utilization ratio is the basis of how much is the available credit limit you are using. It is an important indicator of lending risk. If you have exceeded your credit limit, you might have trouble repaying the money. It will make you more of a risk to the credit issuers and they usually hesitate to approve new credit. Moreover, it will come with higher interest rates.
Here’s what you can do. Keep your credit utilization under 30 percent.
What if your credit utilization ratio is higher than you’d like?
Consider asking for a credit limit increase, however, it is a handful of a task for credit providers.
You can make better if you limit your spending by budgeting. Paying your credit card debt will also reduce the credit utilization rate. Every time you swipe, make sure that you have enough savings to cover the bill in case you will be financially short when it becomes due.
#5 Victim of Credit Card Fraud
You may experience credit card fraud. What is it?
Fraud means any act of deceiving people for personal gain.
An example is when your credit card is physically stolen if you misplaced or lost your wallet. Or maybe steal your credit card number which can be found from a receipt, over the phone or from a website. The criminal usually will rack up debts.
If it happens, report it right away to the credit card company. They do not charge any of the purchases made by the thief.
Some don’t charge, some did like $25 or $50.
Tips in case of credit card fraud:
If lost, report immediately to credit card company
Don’t use it for others
Only give your credit card info to trusted companies or websites
Check thoroughly the statement every at the end of each month to see all charges
We need to borrow money and it’s a case-to-case basis. Credit cards are a handy tool to bridge the gap between paychecks. But it is like a chain reaction that is hard to get out of if misused.
To prevent it, better to not charge more than you can afford to pay off and make payments on its due date. With this, you can create a good credit score and can qualify for loans that you might need in the future.
Kim Marks 