For each customer, a credit card is a convenient mode of payment while shopping and buying groceries. And many credit cards offer rewards and benefit packages with enhanced product warranties at no cost, free loss-damage coverage on new purchases and points which may be redeemed for cash, products or airline tickets.
There are many benefits of a credit card but there are also a few things that should be considered before using it. Millions of Americans are affected by hidden fees, compounding interest and cryptic terms.
Credit card companies are known to change the interest rate on debts that were incurred when a different rate of interest was in place; it is similar to adjustable rate mortgages where interest rates on current debt may rise. Though an empowering tool, the credit card can also land you in a financial mess from which it may be impossible to recover.
Starting from students to parents and older generation, if one is not cautious, they may end up paying interests their entire life. As credit bureau collects information on various sources and provides consumer credit information on individual consumers, the risk of getting any loans looms very high. When a consumer has poor credit repayment history, a higher interest rate is charged.
Here is a look at what you should abstain from doing when it comes to credit cards which is as important as what you can do with it.
Avoid Big Expense Purchases
If you are planning to purchase something big online like big ticket expenses, marriage-related expense, purchasing of luxury items, it is better to avoid using the credit card. Paying by credit card can be a convenient and safe way of making big purchases, but this could deprive you of peace of mind.
A number of retailers, from airlines to local authorities, levies surcharges on customers making credit card payments. Many a times, such charges are rarely advertised, making it difficult to compare the true cost of goods and services. Some are flat charges applied on each transaction, others are a percentage fee.
All banks charge retailers a merchant fee for processing payments by debit and credit cards. However, most are reluctant to divulge the fee size. Bigger supermarkets, for example, will be able to negotiate smaller merchant fees due to the number of transactions processed. Plus, credit card payments cost more to process than debit card payments, due to the costs associated with borrowing. There may also be extra security costs borne by the retailer in processing online card transactions.
The reason is that you may not be in a position to clear off the dues for such large expenses in a short period and would land up paying hefty interest charges. Instead, try to get a personal loan. Though personal loan is the most expensive one, yet it definitely scores over credit card because of lower interest rate.
Also avoid purchasing items like food, clothing and gas on a credit card as using the card as a substitute for cash is habit-forming and can quickly lead to debt.
Pay Bills on Time
Paying late bills will affect credit ratings. Always try to pay bills on time. Usually if utility bills are more than 30 days overdue, they are reported and also if repeated more than once or multiple times. It depends on how long the utility company waits before sending your information to the three credit bureaus Experian, Equifax and TransUnion. Generally as long as it doesn't exceed 30 days before you make your payment, you are fine. Check with your utility company and explain to them the problem and they will more than likely set up a plan for you so your credit will not negatively be affected. Utility companies are known for working with most people.
Never Withdraw Cash Using Credit Card
Never use your credit card to withdraw cash. Common negative payment hierarchy practices mean that you will pay the high interest rate for cash advances until the entire card balance is repaid in full. This means your $100 withdrawal will end up costing a lot more than $100. Apart from the hefty interest being charged per month, some banks would also charge a transaction fee for the withdrawal. It's also a good idea to ensure that the PIN for your credit card is different from that of your current account, to avoid accidentally withdrawing cash from your credit account.
Avoid Closing Credit Cards with Balance
Never close a credit card with balance in it. With ever rising prices and credit card interest rates, more consumers are trying to limit their debt by closing credit cards. When you close a credit card that has a credit balance, your available credit or credit limit on that card is reduced to zero and it looks like you have maxed out the card. When your credit score is calculated, the amount of debt you have accounts for 30% of your score.
Having a maxed-out card, or even a card that only appears to be maxed out, will have a negative impact on your credit score. Very high credit card interest rates are another reason why people close their accounts. Keep in mind that if you still have an unpaid balance on a credit card with a high interest rate, closing the card will not stop the accumulation of interest on the unpaid balance.
Don't Use Credit Card for Daily Expenses
One of the most tempting things to do is using credit card for meeting daily expenses as it becomes difficult to depend on the cash you earn from your job. The only way to use credit cards effectively is to make small purchases you can afford to pay off at the end of the billing cycle. You should have the cash budgeted to meet the full balance due.
If you charge merchandise to a credit card without a payoff plan, you will wind up carrying a balance over to the following months and will be responsible for paying the interest charges accrued. Many families are deep in debt because they began using credit cards to pay bills or buy daily necessities like milk and bread. It is better to have a monthly budget for these things and use cash or a debit card to make purchases.
Never Co-Signing on Credit Card for Friends
Not everyone can get a credit card, especially people with poor or bad credit or those with no credit. Those people are unable to get a card because financial institutions sometimes simply refuse to take a chance on them. However, they still can have access to specific type of credit card that is a credit card with a cosigner. Co-signing for a friend may seem like a nice thing to do, but it puts you at risk if your friend doesn't make payments on time or defaults on the debt completely. The irresponsibility of your friend will show up on your credit report.
Never Use Credit Card for Online Purchases at Unsecured Web sites
Avoid entering credit card number into an unsecured Web site. Always ensure that the Web site uses https not http. And ensure that the browser displays a secure lock which can be found in bottom right corner or towards the top in some browsers. Also check if the Web site displays a certification from trusted companies like VeriSign or Thawte.
Large sections of people are now using online banking and credit cards to make purchases on the web. While this is the way of shopping, going forward, extreme caution needs to be exercised while giving credit card details for online shopping.
Try Not to Pay High Interest Rates
Credit scores are three-digit numbers lenders use to gauge your creditworthiness. Lower scores mean higher rates or perhaps no loans at all. Those people with top scores have the option to budge for lower interest rate. If their issuers raise their rates or lower their limits, they can move their business elsewhere. Find out your credit score, if it is 700 or better try to negotiate a new rate.
Don't Use Credit Card to Gain More Reward Points
Be judicious while using credit cards. Usually credit card profits from your indiscipline. Credit card customers need to educate themselves on which card rewards are worth acquiring. In fact, some of the rewards are only disguised to lure the customers into spending. Customers should look at credit card rewards as a way of obtaining savings, rather than to make purchases, specifically, in order to get points, every single time.
Suppose, if you are planning to buy something worth $25 and spent $200, it is not really good. If at the end of the month, the extra hundred or so dollars cause you to miss the bill payment deadline, your outstanding balance increases due to the late fees along with an added interest. These put together would erase the saving you made.
Never Spend More Than You Can Pay
If one analyzes credit card usage, it can be found that more than ninety percent of the purchases people make are things which they don't need or could have been postponed. Once the bill comes up for payment, most people realize that they don't have enough money to repay the whole amount.
Responsible use of your credit cards will help you establish a solid credit rating and avoid financial problems. Besides, the interest is calculated from the date of transaction and not the due date, so you even lose the credit period. No wonder it doesn't take long for small credit card debt to blow up into a huge one.