Credit cards are one of the smartest ways to make payments and if used properly, can help build a great credit score, which will be helpful eventually. However, most of us end up using credit cards in the wrong manner, which amounts to, us spending much more money. However, credit cards increase your purchasing power. And, if used smartly, you stand to benefit.
Some smart ways to use credit cards to create positive results, include the following:
The first step to ensure effective use of credit cards is to ensure that you spend within your credit limit. “It is extremely important not to cross the credit card limit because the bank or from where you have taken the card, typically levies are charged for crossing the card limit. In general, the charge is 2.5% of over limit amount or Rs. 500, whichever is higher.”
“Further, crossing even 50% of your credit card limit is seen negatively and it lowers down your CIBIL score. Going forward, this will affect your loan taking capacity and can increase the loan interest rate for you”, said Ankur Choudhary, Co-Founder and CIO, Goalwise.
Credit cards come with a lot of fees. It is very important that you check them thoroughly. Credit cards have fees like joining fees, late payment fees, annual fees and cash advance fees. They also have fees like rewards redemption fees. It might come as a surprise, but some credit cards even levy a joining fee. Experts say that it is better to opt for cards that do not offer any joining or even annual fees. This can be done as many cards don’t charge these fees if you apply through a loan aggregator or if you spend a certain amount, using the credit card.
Paying in full before the due date is probably the best thing that one can do. In fact that the smartest way to use credit cards; credit cards offer a grace period to make payments. This is an interest-free period to repay all dues. Banks usually grant a grace period of 30 to 60 days. Make sure not to carry forward any balance from the previous billing cycle, or else you will never get the benefit of grace period. This acts like a short-term loan without interest if you can pay outstanding dues with your bill payment date.
Do not avail credit cards just for the sake of reward points. However, if you effectively use credit cards, you can end up enjoying a lot of benefits and reward points including cash back. In fact you can avail exclusive concierge service for holiday packages, gift delivery, movies, travels and even hotel reservations. Banks offer cashbacks on utility bills (electricity/water), grocery purchases if you use credit cards. Use it to your advantage.
Make sure that you build a good credit score and use it to your advantage. A good credit score means you can negotiate with your lenders for a waiver of processing charges and other fees. It allows you to access cheaper credit.
Use your credit card as a payment mechanism and a source of credit in difficult times. But always pay your credit card bills in full before the due date.
If used smartly and effectively, a credit card can be of much help.
However, make sure that you exercise some restrain and use your discretion before using a credit card. Use only when required and clear dues within the stipulated deadline.