Credit cards provide holders with several benefits, including greater purchasing power, the ability to pay for emergency expenses, and opportunities to earn points or rewards.
However, credit cards need to be used responsibly; otherwise the owner will be slapped with a hefty monthly bill, or end up deep in debt.
To avoid the above scenario, whether you are a newbie or a veteran credit card user, here are a few tips to prevent the high fees or charges commonly associated with them from piling up.
1. Take time to compare credit cards.
Use credit card comparison sites to find the best credit card for your needs and repayment capability. Comparison sites allow you to quickly see what the features and benefits are for each credit card. For instance, you may want to look for credit cards that offer cash back or travel rewards if you think you can maximize those features.
By using comparison sites, you can also see what the requirements are and see which ones you are more likely to get approved for. For instance, some credit cards in the UAE have monthly salary requirements that are as low as AED 5,000 while some premium Islamic cards require a higher salary range.
Other aspects you can and should check out include the annual fees, interest rates, balance transfer fees, and potential charges. These fees and charges are important in the event that you need to make major purchases with your credit card, and you are unable to pay back what you owe immediately. The interest rates, late fees, and other charges can determine how much and how long it would take to pay the balance.
2. Always pay on time.
Pay for your credit card purchases on or before the due date specified on the bill. By paying in full on time, you can avoid paying any interest for that billing cycle.
Credit cards allow you to pay on credit, but a credit card should not be confused with free cash. Resist any temptation to spend more than what you can afford to pay. This way, you won’t feel overwhelmed once the bill arrives, and you can quickly pay off your debt without the added interest.
3. Pay more than the minimum amount due.
Try to pay more than the minimum recommended amount if you are unable to pay off the balance in full. Because of credit card interest rates, the longer it takes for you to pay, the more you end up paying.
Say, you bought an expensive watch using a credit card with an interest rate of 18% and incur a remaining balance of US $1,000. Depending on the card, the company may have minimum payouts as low as three percent of the balance.
If you decide to pay the minimum at three percent or US $30, it will take you three years and ten months to pay the full balance and end up paying US $353 in interest. On the other hand, if you pay US $100, it will take you 11 months to pay the full balance. The total interest will amount to US $85, with the total cost amounting to US $1,085.
4. Never skip payments.
In the event that you can only pay the minimum amount due, pay off your debts religiously. Late or missing payments can incur additional fees including penalties and a possible late fee.
In certain countries such as the US where credit scores are important, late and missing payments can also affect your credit score. When your credit score is affected, you will have more difficulty applying for other financial instruments such as loans or mortgages.
Creditors are more willing to lend you money if you can show that you are able to pay off your debts. So pay off your credit card balances as quickly as you possibly can to avoid fees, and keep your credit score intact.
5. Follow the 35:65 ratio.
Ideally, you should try to pay off your debt immediately, or as soon as possible. For major purchases that will take longer to pay off, try to make sure that the balance is less than a third of your credit line. This is known as your credit utilization ratio.
For instance, if your credit limit is US $3,000, do not let your balance exceed US $1,000. Once creditors see that you consistently go over this limit, you will be deemed a lending risk. In some cases, they might increase your interest rate even further.
Use credit cards to your advantage
Credit cards can effectively increase your spending power, allowing you to purchase items that you need for yourself, your family, or your business.
However, be careful in choosing and using credit cards and pay off your debts as soon as possible. This way, you can avoid being buried deep in debt, and maximize the convenience that comes with owning and responsibly using a credit card.
Deepak Kumar is a Co-Founder of SoulWallet, a neutral comparison portal for consumer financial services. With a team of “out of the box” thinkers and a deep understanding of the UAE consumer banking industry, the company helps customers make the best choices when shopping for financial products such as credit cards and loans.