Using Credit Cards correctly

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No one should be under any doubt that having and using a credit card is fraught with financial pitfalls if you fail to keep up your payments in full and on time. Having said that though, credit cards can be a tremendous asset and convenience if you know your own financial management habits, know how your credit card works and if you use your credit card correctly.

Firstly, you should make sure that the credit card you use suits your style of financial management. Not all credit cards are created equally, and not everyone has the same financial management habits. As mentioned before, if you’re likely to be running up balances month after month, choose a card with no frills but low interest. If you’re good at paying off the balance each month, choose a card that provides rewards such as cash back or air miles.

No matter which credit card you choose, nearly all credit cards come with an interest free period. What this means is that any purchases that you make on the card will remain interest free for a certain number of days past the date of the purchase. If you repay the amount before that date is due then you only pay what you’ve ‘borrowed’. If you pay after that date, or only pay a portion of the amount borrowed, then you have to pay interest on the amount – and that’s what we’re trying to avoid. The key to the successful use of a credit card is to maximise your interest free allowance, while minimising any interest or penalty fees that you have to pay.

Assume you have a brand new credit card with no balance owing on the card. You start to make purchases on the card throughout the month and at the end of the month your first account statement comes in stating the amount you owe. From that date onward you have a certain amount of time in which to pay the amount owing before the credit card company starts charging you interest. This is your interest free period we referred to earlier, and the length of that period will vary from credit card to credit card. If you pay the full amount owing on the credit card before your interest free period is up, your balance goes back to nil and you can start all over again. Of course, you can continue to use your card throughout this period of time, however the purchases you make will be carried forward on to your next billing cycle. So if you start making purchases on your card from the first day of your monthly billing cycle, and you have a two week period after your account statement arrives in which to pay before the interest kicks in, then you effectively have a 6 week interest free loan from your credit card company. If you marry this up with a credit card that offers cash back rewards, air mile points, or some similar incentive, then you are really maximising your card’s potential. The key, as ever, is making sure you only use your card for items that you can afford to buy each month, and that you pay your bill in full and on time. Once you fail to pay the full amount owing on the card before the due day and start to incur interest, the only way to stop paying interest and penalty fees and return to interest free purchases is to pay the full amount off.

There is one notable exception to the interest free period mentioned above, and that is when you use your credit card to take out cash. In most cases not only will you be hit with a fee of around 1.5%, but you’ll also be charged interest on the amount immediately. Additionally, chances are the interest rate imposed will be higher than your typical interest rate for normal purchases. This makes taking cash out on your credit card an extremely expensive proposition, and should therefore be only considered in an emergency.

Another aspect to correctly using your credit card is to ensure that you read all of the literature that the card issuer sends you. Credit card companies can, and do, raise the interest rates or otherwise change the details of your contract (they are legally obliged to give you prior notice before doing so), so it pays to keep abreast of any changes that they enforce. Don’t be afraid to consider changing credit card companies if you feel the new terms and conditions are uncompetitive.