About Credit Cards
In the previous blog titled: Credit Card vs Line of Credit: Which One Should I Use? You learned the following about a credit card:
- It is a card that is issued by a financial institution, such as a bank or a credit union, that enables the cardholder to borrow funds from the institution, then pay the money back, with interest, based on the borrowing agreement.
- It can be used to access funds by making a purchase or by doing a cash advance.
- It typically has a credit limit (maximum amount of funds that can be accessed for purchases) and a cash advance limit ((maximum amount of funds that can be accessed for cash).
- The interest rate on a credit card is fixed and usually ranges from 10% to 30%.
- Interest is calculated daily and is based on Compound Interest.
- You have a grace period (zero interest period) on purchases from the date of purchase to the bill due date, provided your balance is paid in full each month.
- If you have a revolving balance on your credit card there is no grace period, interest is charged daily on old and new purchases.
- There is NO grace period on cash advances, interest is charged everyday on the advance until it is repaid.
- Most credit cards give reward points that can be used to purchase travel, gift cards and other items.
While many people have a love-hate relationship with their credit cards and will even go as far as cutting them to avoid making purchases, I believe the credit card is one of the greatest inventions!
It is NOT the credit card that is BAD….what is bad is the irresponsible use of the card.
If you’re guilty of using credit cards irresponsibly, don’t beat yourself up too much….it wasn’t totally your fault. School didn’t teach you how to use credit cards wisely, and the bank certainly didn’t explain the credit card user manual either.
To capitalize on the great benefits that credit cards offer, you just have to learn how to manage them effectively.
How to Effectively Manage Your Credit Cards?
Before you apply for a credit card, you should first consider how you plan to use it. This will determine the type of credit card that best suits your situation.
Here are some of the questions you should ask yourself before you choose a card:
- Does the card have an annual fee?
- If there is an annual fee, does your usage justify the fee, and does it cover travel and car rental insurance?
- Does the card have a reward program?
- How does that card’s reward program work?
- Will I be carrying a balance? (You shouldn’t be carrying a balance, but if you think you will, look for a card with a lower interest rate and a longer grace period.)
- Can I choose my bill payment date? (Having all bills due around the same time each month is a bad idea. Where possible, pace your bills so that they are due in different pay cycles.)
The BEST way to manage your credit cards is to avoid cash advances and to make only purchases that you can afford to pay for with cash. If you know you won’t have enough money to pay the bill in full by the due date then you shouldn’t be making that purchase.
A great way to manage credit card payment is to set up automatic bill payment from your bank account. You have the option to set up automatic payment for the full amount or for the minimum payment.
My son used to forget to pay his credit card bill sometimes, which would have messed up his credit if my husband didn’t notice in time. To prevent this from happening, my husband set up automatic payment for the minimum amount. So even if my son forgets, at least the minimum payment is paid, and his great credit record stays intact.
But even though paying just the minimum amount may not negatively impact your credit score, in the long run, it will definitely impact your financial situation in a negative way! How?
When you make only the minimum payment the following occurs:
- You lose the zero-interest grace period.
- Interest is compounded daily and calculated on both old and new purchases.
- It takes a very long period to pay off the debt.
- If new purchases are added frequently, then you may be repaying credit card debt even after retirement.
I also believe that having more than one credit card could help you to manage your usage more effectively. For instance, if you’re like me, who puts almost all purchases on the card, everything will be due at the same time. If you have only one card, you’re unable to stagger your usage and payment dates.
So here’s what I do so I don’t have to pay for all my purchases in one billing cycle:
- I make an effort to know the billing period for the two main credit cards I use for consumer purchases so I know the cut-off date.
- I usually use the card with the later cut-off period at all times. This gives me the longest time to pay, especially for big-ticket items.
Another reason for having more than one card is that If you have to make a big-ticket purchase, and you know that you won’t be able to pay in full by the bill due date, you can put that purchase alone on one card so that the interest you pay will be on just that item and not on all your subsequent purchases.
To help you understand more, here’s an example that I shared in my book: “Good Grades Rock But A+ Does Not Equal $ucce$$”
One year, my microwave died, in January. The replacement and installation cost was almost $1000. January is my poorest month because the Christmas expenses are usually due. Having no microwave didn’t just mean lots of inconveniences; since it’s an over-the-range one, it meant that I had no fan to vent the food smell while cooking.
But because it’s a big-ticket item, I really wanted the purchase on the card I use for travel rewards, but I also wanted the longest time to pay for it. However, there was still one more week before the billing period ends, and if I made the purchase then, that bill would be due February 15th. So, what did I do?
I waited for the billing cycle to end, and purchased the microwave the day after. Hence, I had until March 15th to pay the bill, instead of February 15th. My husband and I had four additional paychecks in total before we had to pay for the microwave. So, it was very easy for us to pay the bill in full without incurring any additional cost.
Having multiple cards likely increases your credit score as well. But How?
Let’s say you have two credit cards. Chances are your total credit limit for two cards will be greater than it would be for only one card. A higher credit limit will reduce your percentage usage and a lower percentage usage will result in a better credit score because your credit usage affects your credit score.
I hope by now you agree that the credit card is one of the greatest inventions and you now know how to use them effectively to capitalize on the zero-interest grace period and the great reward points for travel, gift cards and other items.