It is important to ask certain questions: Have you chosen the right card? Do you know the interest rate on your credit card? Did you stop to read the fine print? Do you depend on your card and spend the maximum credit limit? Do you buy impulsively and purchase things you don’t really need? Have you been paying only the minimum amount due or paying late?
Credit cards have changed our lives and our spending habits because of their sheer convenience. However, there is a danger that credit cards can tempt you to spend without foresight. So it is important to ask certain questions: Have you chosen the right card? Do you know the interest rate on your credit card? Did you stop to read the fine print? Do you depend on your card and spend the maximum credit limit? Do you buy impulsively and purchase things you don’t really need? Have you been paying only the minimum amount due or paying late?
Is a credit card for you?
Before even getting a credit card, question your need for one, and consider how healthy your financial practices are. Are you actually managing your finances, or do you swing from month to month on pure chance and luck? Now is the time to take control:
- Treat your finances as if you were running a business: Review all incomings and outgoings to see if there any expense you can actually cut back on that doesn’t reduce the quality of your life.
- If you go the online way to pay bills, make sure to use a secure Internet connection. This might seem obvious at first, but credit card and banking fraud is on the rise, and it always pays to be that little bit more careful.
- Maintain, on a monthly basis, four totals: your debts, expenses, income and assets. Make sure you see these totals every day, and that you adjust them daily. The idea is to have them foremost in your mind so that you remember your goal.
Seeing your debt total slowly decrease and your assets increase, which will motivate you to continue!
Try and remember these practices whenever you do opt for a card:
- Look for cards with a reasonable rate of interest – stay away from the 0% cards unless you know for a fact that you can make your payments on time.
- Be wary of cards with high interest rates, large yearly membership fees and monthly maintenance as well – always read the fine print.
- As difficult as it might be, try and restrict your credit usage to either only emergencies (which means you need have an emergency fund in place, to minimize heavy borrowing), or for fixed, recurring expenses (groceries, petrol).
- And finally, when you do get your card, make sure to pay your balance in full every month, or stick as close to this effort as possible.
Get debt-free
To get out of credit card debt, take a hard look at your finances and find out how much you can practically afford to pay each month.
- Track your daily spending for a month.
- Categorize your expenses by priority – what you need, versus what you want.
- If you have more than one credit card (and what is sensible is to own only one), then arrange your credit card account statements by rate of interest, from highest to lowest, and sum up all your credit card debt balance.
- Ideally, you should pay off entire amounts at one shot. However, if you can’t pay off the entire balance, at least make a payment that is in excess of the minimum due. The minimum payment amount is simply the interest amount due on the principal. If you only pay the minimum you will never pay off the card. While you’re doing this, try and stay away from using the card.
- You could also apply for a low interest card and transfer debt from the card with the highest interest, and focus on paying off your cards, prioritizing payment of the highest interest card.
- If you have savings that you do not want to dip into to pay off the credit cards, look at what you are earning on your savings and what you are paying on the debt. One is always higher than the other and it is not your savings interest rate. Use your savings to get out of debt and know that you can always charge an emergency on your credit card. Take the interest charges you are not incurring every month and save that instead.
Once your payments are made, exercise discipline and close each card. The key to using credit wisely is to stay away from needless and crippling debt.
Good Information. But one more doubt has to clarify in this. If we are paying full amount due on every month, is there any additional charge for
all these purchases on the Financial Year End. Because in some card they have mentioned as "interest is this much for your purchase like that…."
Could you please clarify this.
excellent point wise explaination.
Great post! Just wanted to let you know you have a new subscriber- me!
would be grateful if you can tell us which are the right card to choose because all credit cards have the same mulltiplying effect. Can we hve banks which are safe to have.
As said in the article rightly, it is you (the card holder) to manage the finance not the card issuer. It is very good and safe as long as you use the card in place of currency (for safety reasons), it really a good option.
After going through the contents of the article, I feel the problem is not with the cards but with human behaviour. Though we say that the human behaviour is highly unpredictable, but these banks who are issuing these cards have gone to a great length to understand human behaviour. In certain situations / circumstances, most of the normal prudent person will behave in a similar fashion and these banks have understood that behaviour.
Let me give you an example. Imagine a situation wherein you have gone to buy a house hold item. You have negotiated the price & it is the time for payment. There are 3 options for payment: hard cash, cheque or the card. How many of us are there who will feel no difference while making payment by either option. Let me tell you the percentage of such people is negligible. When you make the payment by cash, you have to count the money. You will certainly feel how many currency notes of certain denominations are going away from you for buying that item. How much efforts you had made to earn that much money that you are counting now. Here your brain will take over and you will start analysing: Is the item really required for me? Can I manage without this item? Can I postpone my purchase as there could be some incentive schemes with the purchase of this item in future? Have I not managed without this item for last so many years? The brainstorming will go till the time you reach a right conclusion/ decision. If the item is really essential, then you will buy it otherwise you will leave the shop with your money intact in your pocket. Now suppose, you happen to make the payment by cheque/ card, you have no such feelings. You just take out the plastic card or a paper cheque and give it to the shopkeeper and the transaction is complete. The emotional role of the brain is nowhere in the picture. We have just acted upon our instincts. That is the basic difference. So the problem does not lie with cards. It lies with the method of payment we choose in a given situation. If making of a payment is inevitable like payment of electicity bills, house tax etc, it makes no difference, whether we pay by cash, cheque or card but on all other occasions, the method of payment certainly matters. Therefore, choose your method of payment carefully, which method is best, nobody knows better than you.
Rightly said but there is a problem. Each household of a middle class family runs grocery and other bills in the tune of 15 to 20000 bucks per month. Its agonyzing to get cash withdrawals each time.
Its unsafe to carry 4-5 thousand bucks in pocket too.
Credit cards do give a cool off periods of few weeks to make the payment ( no one can time the start of credit period cycle for full 50days credit)
Plus i get extra reward points which inturn buys be petrol each month since shops pay the 2% cc processing fee.
I have over 10 credit cards but I use max 3 of them because of their payment dates 10th 20th 28th of each month so there is sufficient balance in my bank account.
I do like to share a tip with people.
have 1 paper tucked somewhere you can find which has your WISH LIST
This list can be checked whenever possible and ask the question " CAN I AFFORD IT ?"
(thats the framous like of Suze Orman and it works each time)
I bought a 42" Panasonic plasma for Rs.32,000 when similar models were for Rs.55,000
I bought a Phillips home theather system for Rs. 6,500 when similar model was for Rs. 13,000
There is no secret to how i manage to get deals. Its that small piece of paper called my WISH LIST which i keep reviewing and when i research and find the right price which i can afford i don't waste time and just grab it.
I own only 1 card and I use it where ever it is accepted because credit card statements helps to plan the budget more accuratly and can track the expenses easy. Debit card statements also has the same benefit but I am afraid that debit cards are more prone to fraud. I always try to payoff the full balance within the period allowed. I am not a spendthrift and fortunatly my expenses are always within my budget.
To my experience credit cards should be handled very carefully and planned other wise it will be deadly.
Really it is astonishing. Cant we live without a credit card ? If once you get into this circle it is very difficult to come out unless you are determined firmly. It is useful to a certain extent to the very busy people whose income will bw around >1 lakhs per day.
there is not even one perccent of the spending public who own/use a credit/debit card in indian circumstances. it is true the percapita income is risen meteorically, still the indian buyer glances only his purse whether he has any rupeeworth the spending. it is not the possession of the card that worries the consumer but actual money that he will come into his purse. even if the economic situation in india improves beyond ones capacity to think and spend, a credit card is nolt in his line.
one unduly interested in economic life of an indian
may 2011
I use credit cards to make most of my payments. This is very helpful in tracking the expenses. All the spendings have proper allocations at the begining of the month. For ex. Groceries, Petrol & travel, Eating out and entertainment, recurring bills. A separate allocation is also made for white goods/yearly expenses such as school, travel, insurance etc.
This planning combined with credit card helps a great deal in managing personal finance. The reward points is just icing on the cake!
what about service charge? is it not extra payment on normal purchases ofsimple items . if you want natural saving stay away from credit card.better keep away from poision