Credit cards are those powerful little tools some of us use to shoulder the responsibility of keeping our finances in order, but negligence can lead to horrendous financial outcomes. Establishing if you actually need a credit card and then choosing the right credit card and then undertaking its proper management requires some crucial considerations:
Undertake a research/ analyse: The best way to find a credit card matching your spending habits and requirements is to do a comparative study of the cards offered in the market. Shop around, read and research to get a better deal. It’s good to be loyal to your bank but sometimes the best credit cards are provided by the credit unions, non-profit banks and building society. Try Credit Card Finder – it’s Australian and free!
Compare/know the interest rates: Interest rates can either be fixed for a length of time (the honeymoon period) or variable right off the bat. A card with a low fixed honeymoon rate allows you to get on top of the debt within that period, however be careful, because after that period you might be paying more than other cards. When you apply for a credit card, don’t always assume the lowest interest rate is the best for you. It’s also crucial to know how the interest on the card works. If your credit card payment is not made on time or in full, companies can charge interest on the whole balance right from the date of purchases.
Be cautious about the interest-free period: Always keep in mind the interest-free period and try to avail the benefit out of it. But if you do not make your payments on time or in full an interest-free period on future purchases can be forfeited until you clear the original amount owed.
Beware of the awards trap: These reward cards normally have a high annual fee and also charge higher interest rate on outstanding debts than non-rewards cards. Some rewards cards tempt you to accumulate a high number of points just to allow you to be able to acquire ‘not-so-worth it’ offers. And you get tempted to collect those points and end up spending a huge amount.
Know-it-all (taxi and airfare surcharge): For instance when you pay for a taxi or air ticket using your credit card, you usually incur a surcharge whereas using a debit card usually entitles you to incur these expenses with a smaller surcharge or no surcharge at all.
Considering overseas use: When you make purchases using your credit card overseas it will incur a currency conversion fee. This is normally quite low in the case of travel cards but check your card out before you go.
Costly cash advances: Cash advance interest rates are significantly higher than the interest rate on purchases. Normally there is no-interest free period so keep this in mind before using a credit advance on your credit card.
Dump the whole idea: The best way for a lot of people to deal with credit cards is not to have one at all. Debit cards are the secured way to pay for everyday expenses. If you think you must have a credit card then keep it on standby for emergencies only.
Once you have a credit card:
- Always make timely payments to avoid late payments and extra interest.
- To save on interest and to pay off your balance, try to pay more than the minimum repayment.
- Switching to a card with a lower interest is a better idea if you are only able to the pay minimum monthly repayment.
- Keep a track on your credit card limit so that you always have a hold on your spending habits.
- Consider setting up a direct debit to pay off the fixed amount you owe every month.
- Avoid cash advances because they charge higher interest.
- Be informed about all the fees and hidden charges.
- If you have multiple cards consider switching to only one card. There is no use paying annual fees and extra interest if you don’t really need to.
Being vigilant that credit cards work in our favour rather than dragging us deeper into debt is a constant concern.
Follow these five golden rules:
- The most basic financial management tip is to pay off your most expensive debt/interest first.
- Repaying more than minimum amount is the best and only way to deal with troublesome credit card debt.
- Do not get lured by reward programs and low interest periods. Look for a fee-free card offering a similar credit card limit, features and flexibility without all the bells and whistles.
- Be aware about the interest-free period and take advantages of the same before it lapses.
- If you really can’t afford it or are having trouble paying off your credit card debt now, think about pulling the plug and concentrating on paying the remaining debt down to zero.
Closing your credit card:
If you have decided to put a stop on your credit card don’t fall for the persuasive tricks of your credit card provider. They will leave no stone unturned to make you re-think on your decision. There are certain steps you need to take to close the card properly.
- First of all, cancel all the direct debit payments from your credit card.
- Make sure your account balance is zero and you pay off all your account balance.
- Call the credit card provider about closing your credit card account. Note down the date and time you called, reference number and name of the customer service officer you speak with. All these things might be needed to track the status of your account in the future.
- Put in black and white that you want to close your account including essential information such as your credit card account details, details of your phone call and your signature. Send it to the concerned authority. Always ask for the acknowledgement of the request.
- Ensure that a confirmation letter has been received stating that your card has been closed properly. If you do not get one, follow up with your credit card provider.