Using your credit card right

Written by Lisa Pallavi Barbora

Lisa Pallavi Barbora is a Senior Consultant for Content at WFAN. Lisa is also a founder of In her earlier avatar, she was a National Writer and Consultant for HT Mint - a premier business journal in India.

July 20, 2020

You may think that using a credit card is about buying things you can’t otherwise afford or affording stuff even if you don’t have a regular income. Many credit card users who pick it up with this thought end up overdrawing and then having to pay the price for that in late payment fees and interest costs.

Those who are not credit card users as yet fear that taking one will lead to debt and defaults.

While the word credit itself means debt and hence, credit cards rightly are viewed as increasing your debt. Since you don’t see real money going out of your wallet or even bank account immediately, it’s easy to get lulled into a false sense of affordability. However, there is a way in which you can get the benefit from credit cards, without having to worry about excesses and indulgences going too far. Let me warn you that this is not a simple solution or a way to evade charges, rather it is about harnessing your will, being aware and smart about using this means of payment.

1. Being smart about it

A credit card essentially gives you a 20 to 50-day liquidity line or in other words helps you stretch money for a maximum of 50 days. Every credit card will have a spending limit based on your monthly earning and credit score among other things. You will also find that the more you spend on your card, the more the limit will get extended over time.

However, just because you have a card, doesn’t mean that all your expenses should get on it. Here’s the thing, spending on your credit card, does give you a false sense of affordability.

If you expense everything on to the card, you will undoubtedly overspend. If for some reason, your income suffers and you can’t pay back, then even your basic spending will suffer as your credit card will no longer be useable or will have huge interest charges kicking in.

As a rule, don’t put any necessary household expenditure on your card. This includes groceries, utility bills and any other expense that is a mandatory monthly spend for your household.

Keep those from the money you have in your bank at the moment.

Use your card for the extra spending, travel tickets, bookings and for your monthly entertainment bill. These are expenses you can cut back on if need be and you will not be dependent on your credit card for basic survival.

Secondly, make a habit of spending only around 15%-20% of the limit you have on the card on a monthly basis. That way you will remain within your affordability levels. Just because the card company gives you a Rs 5 lakh limit per cycle, doesn’t mean you can afford to spend Rs 5 lakh on entertainment and shopping every month.

2. Know your cycle

Here is how the 50-day credit cycle works; for example, let’s say your card billing period is from 1st to the 30th of the month, you get 20 more days after that to make the payment. So, your bill will be due or payable on the 20th/21st of next month.  It means that whatever you spend between the 1st and the 30th of a month needs to be paid by the 20th of next month. You should plan your spending and repayment accordingly.

Don’t make a large spend on your card say, on the 25th of the month, because you know that in 5 days your new cycle will begin and you can then take advantage of a full month before that bill is due.

You can do this only if you are aware of your cycle. Make all your large spends on your card at the start of your billing cycle to take advantage of the full 50-day credit period you get.

3. Pay on time

You must remember that any deferred payment on your credit card will mean you have to pay interest. Along with interest you will pay a late payment fee. This fee may be waived if you pay the minimum amount due (usually 5% of the bill), however, your interest on the outstanding will kick in regardless. You must always pay all your dues on time, don’t just pay the minimum amount because interest will be charged on the remaining amount immediately.

This is not a small rate of interest – rather it ranges from 30%-36% per year.

If you keep rolling over your due amount, interest at this high rate will keep getting added.

Also, don’t pay up too early. Instead of paying your bill on the first day of the new cycle, use the 50-day credit to your advantage and pay your bill 4-5 days before your due date. In this way, you continue to earn interest on your money in the bank.

Credit cards give you liquidity and help you stretch your money for a limited period of time. Be smart about it and take advantage of this extension of credit rather than getting carried away.

Eventually, when you have points accumulated on your card, you can even treat yourself to some freebies you can buy from the points. Of course, don’t overspend on the card just to get the points!

Remember we said at the start, using your credit card the right way is a lot about will power and being smart!

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