Written by: Cally Worden
We have a love:hate relationship with credit cards, those innocuous little plastic rectangles that sit in our pockets. On the one hand they offer instant access to all our heart’s desire – well, up to our credit limit anyway. And on the other hand they can quickly become the root of untold financial difficulties through misuse, or a misunderstanding of how the credit card system works. Here are three essential credit card Do’s and Don’ts to help you manage your relationship with your flexible friend.
DO Pay of your Balance Every Month
This is THE golden rule of happy credit card use. We all know the interest rates charged by lenders are not good for our bank balance, so if at all possible clear your credit card to zero every single month. In doing so you avoid paying any interest at all, which effectively means your card offers a form of free borrowing. Even if you can’t pay off the full amount each month it is important to clear as much of your debt as you can. Minimum payments may seem tempting when you have better things to spend you cash on, but delaying repayment prolongs the term of your debt, and can massively increase the amount of interest you pay overall.
DO Pay by Direct Debit
Banks and lenders love their penalty fees. If you miss a monthly payment, or are late making it, then you will be charged a fee. Money for old rope for the lender, so don’t let them get away with it. Set up a direct debit to pay off either a fixed amount or the full requested amount each month from your card and don’t give them the satisfaction of slapping a charge on you.
DO Exploit the CashBack Offers
Many credit cards offer cashback or reward incentives to entice customers to use their particular brand of plastic. If you are comfortable that you can clear your credit card each month it is worth using it to pay for anything and everything you can. It’s surprising how quickly the rewards can add up. In buying ALL our stuff on credit one year we made close to ÂŁ200 cashback – a nice dent in the cost of Christmas. This only works if you are diligent in your repayments though, so get organised and start you can making a profit today.
DON’T Exceed your Credit Limit
Your credit limit is your spending cap. While purchases that exceed the cap may still be honoured, it is possible that they will be rejected. In any event, if you push past this limit with your spending you will be charged a penalty fee. Most lenders will consider increasing your credit limit once you have had their card for around six months. Some may even offer an increase without being asked.
DON’T Withdraw Cash on your Card
Tempting and convenient as it may be, try to avoid taking out cash on your credit card. Not only does every withdrawal amount attract a fee that is usually around 3%, cash withdrawals also attract a higher-than-normal interest rate on the amount borrowed. Crucially, this interest is applied from the day of the withdrawal, so cannot even be avoided by paying off your account to zero each month.
DON’T Get caught out by Dual Purpose Cards
Savvy credit card users may transfer an existing balance onto a new card to take advantage of a ‘0% interest on Balance Transfers’ deal. This is fine, but you need to be aware that fresh purchases made using this new card may not enjoy the same terms. Some cards also offer 0% interest on new spending, but often only for a limited period – say, three months. Thereafter, even if your balance transfer is still enjoying the 0% interest deal, your new purchases will be subject to the standard card interest rates. There is normally a contractual clause that states you must pay off the balance transfer amount before these new purchases can be paid off. If you can’t afford to do this, you will be racking interest up on the new spending at an alarming rate.
Credit is not a bad thing if used wisely. Know the rules, and if at all possible play the system in a way that allows you to borrow for free without getting stung. Lenders work on the basis that the majority of borrowers won’t be this smart – be different, and manage your finances well and you could actually benefit from using the credit system via rewards and cashback instead of lining the pockets of the fat cats in the City.