How to use Credit Card Effectively

Should you really use credit cards? Ideally credit cards are not sound in terms of helping you financially. However, the plastic money does come in handy for regular use and for emergencies.

Never try to spend on something that you normally cannot afford. You can stretch a bit provided you are certain that you can pay off the same within the next month or two. For a normal person one credit card is sufficient, while for some two cards may suffice.

Avoid the debt trap

Why is it that people either dread credit cards or advise you to abstain from it? Imagine paying interest at 3.5% per month on your credit card. So this works out to 42% per year.

If you have Rs.10,000 outstanding (unpaid/rolled over) for a month – you pay Rs.350 as a charge for the month. But if this situation persists for over a year, then your total outstanding dues could run up to Rs.14,000 or more.

So having dues on your cards is like sinking yourself in debt, unless it is within a limit. But if you stay within your limits and pay your bills fully (not just the minimum balance), a credit card would be a good friend.

When to use credit cards?

As long a you are a prudent credit card user, it can help in a lot of ways. Using cards you can pay most of your bills, and use it for emergencies such as hospitalization, repairs, unanticipated expenses, fee for education, etc. Remember that the minimum payment towards credit card only goes towards interest payments rather than the principal.

So as I said earlier it is always wise to pay your credit card dues in full, and avoid carrying over the balance. The only exception is rare cases of emergency or urgent needs where you can carry forward some balance.

Ideally you would have an emergency fund available for unforeseen expenses, but in case you don’t have one – then a credit card help. But even in genuine cases of roll over, you should try to pay off the dues as soon as possible to avoid getting in to a debt trap.

How much to charge on my card?

When it comes to how much, I would suggest you to use it regularly provided you can pay the bill on time barring any emergencies. Credit limit is a tool to control your usage, but that is like a maximum ceiling. For your own well being restrict its usage to 30% of the credit limit..

For example: If your card has a credit limit of Rs 30,000, then limit your card usage upto Rs 10,000 or less. Also ensure that this Rs 10,000 can be payed off over the next credit card billing cycle from your next salary income.

Having a good credit score and credit standing is important for availing loans and other related services from banks. To have a good credit you need to restrict your credit card usage to about 1/3rd of your credit limit and not stretch it to the full limit. Stretching to the full limit is like pushing yourself to the danger end.

Sounds too simple Right? What if your colleague tells you how he managed to use his credit limit to book a flight to Goa to party over the weekend? Now your friend’s experience leads you to believe that you lost by not utilizing your credit limit to the full potential.

Assuming all other factors to be equal, this example shows that you did the right thing assuming you cannot afford to stretch up to your credit limit.

More reading at How to choose a credit card