Using Your Credit Cards Correctly

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A credit card is a tool which, if used correctly, is a tremendously useful asset. However, if used incorrectly it can have long-reaching and potentially catastrophic results. Like most tools though, becoming a master with your credit card correctly simply requires a bit of diligence and the need to follow a few simple rules.

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. 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 outstanding amount. 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. Masters of credit cards never have outstanding amounts (carrying a balance).

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’ 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. Put simply, the interest free period of your credit card is generally the 30 days of your typical billing cycle plus 14 days grace period that the credit card issuer gives you to pay the bill (terms will vary from lender to lender). So, with that scenario you’d have 44 days interest free if you used your credit card to purchase something on the very first day of your billing cycle, and 15 days interest free if you purchased something with your card on the last day of your billing cycle. The absolute main point to remember though is that you only get interest free use of your credit card if you pay off the balance each and every month.

If you can do that and also marry 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 date 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 you will be charged a fee (around 1.5%) and also be charged interest on the amount effective immediately. 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.