We have already mentioned credit cards in a previous post. If you are still unaware of what credit cards are, a Credit card is a bank card that allows you to buy goods and pay for subscriptions. Use the money that does not exist in your account. That’s right, money that you do not have in your account. The bank lends you money based on your ability to earn. The limit of how much you can get as your credit limit depends on your monthly earnings. If you make more money, your credit limit will be higher, given that you have no bad credit history.
Your perception of credit cards will be determined by how you use them. Some people are afraid of them while others may love or hate them. I like them and use them as much as possible. This is to take advantage of them. I do not splurge on unwanted items because I have a credit card. I guess I use them with care.
Whether you like them, hate or are even scared of them, let’s take a closer look at them and see what they are good for and have a bad reputation for. If you are new to credit cards, I hope that I managed to give you some context about them earlier.
The Good
Let’s begin by looking at the good aspects of a credit card, where you can use them to your advantage. It may be only a good experience if you spend carefully using the card and don’t overspend above your means. Most credit cards offer you an interest-free period of 25 days from the date that you used to buy.
Gain Loyalty Points
Credit cards usually get you some deals at the merchants you pay using them. This is because the bank that issues or the credit card company has some tie-ups with them. So they give you some points on your spending. These points can be used to offset part of your expenses when you spend with them in the future. This usually comes with an expiry. Reward points by MasterCard and visa can be an example of this concept. In a way, they advertise that you can save by spending more. Please be aware that this is a technique used by them to influence you to buy more. Don’t spend to get the points though, if you have to spend anyway. Put them on your credit card instead of a savings account. Don’t fall victim to the trends of spending more to save more.
I have received points and redeemed them for my later expenses. These were all on my real expenses. Not something that I incurred for the sake of points. Keep this in mind and only buy stuff that you need.
Gain Cashbacks
This is one of the main use cases of having a credit card. The supermarket I’m shopping at has a 5% cashback policy on my spendings there. There is a cap on how much I receive as a cashback. The cap is 50$. I spend 600-800$ a month on groceries from this shop and I usually get 40-50$ a month as cash backs. Remember this offer is not there when I spend the same amount of money from my debit card.
Given that grocery expenses are inevitable, I’m also receiving some savings on the amount I spend.. sounds good right?. I also enjoy some cash back on the rare dining outs and cab rides. Every penny saved can help us in the grander goal of financial freedom. Before making the payment, remember to check if they have any discounts on the credit cards you have.
Earn Air Miles
If you are a travel junkie and someone who has to travel regularly, you may want to get a card that earns air miles on the amount you spend. Nowadays, you may get air miles with the purchases on hotels and some other related purchases. These points earned over time can use to offset future travel expenses. If you have amassed large enough points, you may get a ticket for free too.
American Express cards are popular for these Air mile promotions. But, the catch here is your frequency of travel and booking tickets using these tickets. It only makes sense if you have such recurring expenses.
Manage Cash Flows
Another great utility of credit cards is the fact you can gain some control over your cash flows. There are cards that can split your expenses over a period of 6,12 or even 24 months, without any interest charges. Imagine an unexpected payment came up. If you have the choice to pay them as interest-free instalments, you can manage your cash flow better.
One way I made use of them was at the time of my new house. I had to buy furniture and other household items. So I was able to buy things on my credit card and split the repayment over 12 and 24 months. All these without having to overstretch my savings accounts.
Borrow Unused Credit
Credit card companies and banks lets you borrow unused credit on the card for a fee or on interest. If you have to tap on to this, you have an option. This way you don’t need to borrow from others, you do it with the bank with the help of your credit card.
As I mentioned, this is to use in real emergencies only. As there are fees involved, you may not want to use them on unnecessary expenses and pay interest. Since the bank already has your credit history and rating information, the approvals can be instant.
Unsecured
Yes, it does not need you to pledge your assets as collateral, so making it unsecured. From the bank’s point of view, this is an unsecured loan. If the borrower fails to pay back the amount, the bank does not have your assets in custody to liquidate.
Even though this is unsecured and you may not lose your property upfront if you fail to repay within a reasonable amount of time. First, they will charge interest and block you from further spending. Then they will start legal procedures to recover the money. Which will impact your credit rating Ang affect your other loans and future loans.
Reverse The Fees
There may be annual service charges involved with credit cards. but more of them than not, the bank can remove this by you calling the bank. If you have used the card enough and above the annual spending rule for a fee waiver, the bank may waive this. Otherwise, call the bank and request to waive the fees.
The bank does this on a case by case basis. Based on my experience, my banks always allowed me to use credit cards for free of charge. In return, I am a responsible spender and always pay the card bills In full.
The Bad
We have covered the best use cases. In which you can take advantage of and enjoy spending with your credit card. Instead of breaking your savings account. Let’s look at the bad side of credit cards. If you spend carelessly, it will be a human problem and not on the credit card. What I will mention in this session is the genuine issues or points to take note of when using a credit card.
Eligibility Criteria
Depending on where you are living, the banks have the least salary rule on your eligibility to get a credit card. If you earn less than that, your application may get rejected. This is in a way helping yourself as well as the bank. If you are already living paycheck to paycheck, getting a credit card can be disastrous.
Eligibility criteria depend on your credit history and any previous hints of bankruptcy. If you have been through financial embarrassment, the bank may reject your request.
Affects Credit Score
If you miss paying back the credit card or fall behind in paying the credit in full (except for interest-free instalments). The bank will have to report this to your nation’s credit bureau. This bad credit history will prevent you from getting a mortgage loan or any other loan in the future.
Always remember to only spend the amount you can pay back in full at the statement date. You may end up paying a bigger price in the future if you choose to only pay the smallest amount required. Always pay the bill in full.
High Interest
High interest is charged on the outstanding amounts that are not paid on the due date. The bank will also charge you some penalty for missing the payment date, on top of the interest charged. These interest rates are like 18-25% per year. This is a huge amount of money and can push you into financial difficulties in the future.
There may be some small differences in the interest rates charged by the different banks. More often than not, this is always quite high. Thus, always remember to pay the bills on time and in full.
Fees
While some card fees are waived, some card fees may not be waived. In most cases, you will only know this when the bank charges you the fees. Especially if you are not spending using the cards. This is because the bank only makes money when you spend it on the cards. They get commissions from the merchant of your purchases.
Do proper lookouts for all the potential fees involved with credit cards before you get them. Ask them for the card replacement fees. And fees involved with supplementary cards too.
Bank Can Change The Credit Limit
You will also need to be aware of the fact that the banks can make changes to your credit limit over time. You have a choice to increase your credit limit with your increased ability to earn more. When things go south and you lose your high paying job or business. They can decrease your credit limit.
If this happens and you already maxed your high credit limit, the bank will ask you to reduce your outstanding amount. If you are not prepared for this and do not have a backup money source, this can put you under a lot of stress. Remember not to always max out your limits and don’t overexpose yourself to debts.
Conclusion
I hope I was able to give you some perspectives about credit cards. I know of friends who do not have a good relationship with credit cards. Always remember to use them wisely and remember not to overspend. Don’t put yourself in trouble with wrong credit card habits.