A credit card, more often than not, can be viewed as a short term, unsecured loan. But when you need to live on credit, it is good to know some ground rules. Ashwini Paralkar brings you a concise user-manual for using your credit card smartly.
Credit cards can help you in managing your cash flow. And if used wisely, it can be a boon in disguise. Note the pointers below and make the most of this little luxury, which when unchecked can turn into quite a liability:
1. Choose a card that suits your needs: A cash-back rewards card is your best bet. You will be delighted when you spend and actually contribute a part of it to your savings booty. An excellent example would be using the card to buy a movie ticket and getting another absolutely free.
2. Read the fine print: Many a time, credit-card holders receive a rude shock when some unexpected charges show up in their monthly statements. These surprises may even be completely legal, if the card issuer has already mentioned them in their initial contract. Furthermore, the credit-card companies retain the right to change the terms any time. Reading between the lines leads to a better understanding of late payment charges, interest dues and annual fees. Do not get yourself a card on the basis of temporarily attractive offers that may leave you with a flashy credit card, which, however, ends up like a financial burden.
3. Consolidate your credit-card debt: This would be the situation where you consider putting all your eggs in one basket. Do understand that if you carry balances on multiple credit cards, you actually pay a higher rate of interest. Consolidating all balances on a single card will help you bring this cost down. Also, make it a habit to pay all your bills in full. That way, you do not have to pay any interest on the outstanding amount.
4. Make your card count: Please remember that you end up paying a hefty interest if you use your credit card at an ATM for cash advances. Instead, you may smartly use your card to pay off your utility bills and other expenses, which required hard cash earlier. This way, you enjoy an interest-free credit window period. You may also buy home-décor furnishings or that expensive home-theatre system you always wanted with just a simple swipe, and opt for interest-free EMIs, if available.
5. Keep a tab on your spending: Chart guidelines for your expenditure. Avoid impulsive urges to buy things you don’t need. Also, remember that expenses on credit cards are subject to service tax. So swipe your card only for payments with no service fee. For example, service tax is not charged on retail transactions although it is charged on late fees and other applicable charges. If you purchase petrol using your credit card, a certain percentage of the transaction value is subjected to a 2.5 per cent surcharge or a flat fee, depending upon the credit card-issuing bank. Also, according to a recent mandate, purchasing gold (coins and bars, not jewellery) with credit card no longer provides the option of EMIs, and may result in a direct watch on your activities by the governing authorities, leaving you with no alternative but to buy your gold in one go.
Understand that ‘plastic money’ is a debt that needs to be paid off from your own pocket. Perhaps the
wisest way to use a credit card would be to remember not to increase expenditures in direct proportion to the increase in income.
