In our increasingly cashless society, there is no doubt we all need a credit card. But to to ensure you don’t run up debts, make sure you are using it to pay and not borrow.
As you take your credit card out of your wallet, ask yourself this question: Am I using my card for the right reasons? Then, think carefully about the answer.
If you use your card to pay for everyday transactions – to avoid carrying round wads of cash – or to build up air miles, loyalty points or cashback returns, then this is all good. That’s provided you pay off the balance every month, of course, as clearing your balance effectively turns your credit card into a monthly-billed debit card without any interest. [Compare UAE air miles credit cards | Compare Saudi air miles credit cards]
However, not clearing the monthly balance is not so good. Because the key to having a credit card is remembering that it allows you to do two things: it lets you pay and it lets you borrow. What you want to stop, above all else, is the borrowing element because that can be very damaging to your finances.
Here are five credit card habits to avoid…
1. Taking out cash: This is a no-no
Interest rates on cash advances tend to be much higher than a normal credit card purchase. Almost all providers will also charge a fee on the cash withdrawal itself, and the interest-free period you receive on regular purchases does not always extend to cash. Added to that, if your card is already loaded with debt, the cheaper forms of debt (such as balance transfer debt) will be paid off the card first, meaning that higher-interest earning cash withdrawals will be paid off last. In short, you start paying for that withdrawal straightaway, making cash a very expensive way to borrow. [Related: Credit card cash withdrawal fees add up fast]
2. Topping up your income: Can you really afford it?
If you are using your card to pay for things you simply cannot afford – like a dream holiday – it’s a slippery slope to financial disaster. People with maxed-out cards often don’t have the means to pay off the full balance, ensuring they only pay off the minimum balance. Do this over an extended period of time and that dream holiday becomes more and more expensive. Let’s say you owe US $15,000 for that dream holiday and you pay an annual interest of 30 percent. If you only pay the minimum balance – typically calculated at five percent – of US $200, it will take you 28 months to pay it off. That is two and a half years of debt repayments for one holiday and all the while, the bank is making a pretty penny off you.
3. Making international transactions on small cash items can cost you
Hotels, flights and other overseas spending are sometimes only payable by credit card especially for bookings from overseas. But for smaller items, remember that many credit card companies apply hefty fees on transactions made abroad. This is known as the foreign exchange fee which is can be anywhere between two and 3.5 percent of your expenses. For example, if you buy a US $200 handbag, the real price would be US $204 if you add a Forex fee of two percent, which will appear on your statement. [Check FX fees on UAE credit card comparisons | Check FX fees on Saudi credit card comparisons]
4. Paying off debt: Spiral of debt
If you use your credit card to pay off other liabilities, you will quickly descend into a debt cycle that is difficult to emerge from. It can be all too tempting to withdraw cash to pay off a loan or another credit card balance, but all you are doing is widening your debt burden. Similarly, transferring a balance from one credit card to another to keep creditors at bay may work in the short-term but it leaves you vulnerable to running up another big credit card bill. Before you know it, you could be in a situation where you do not have the funds to keep up with repayments. It might be safer to consider a consolidation loan instead.
5. An emergency (is it really?)
Using a credit card to pay for life’s essentials only works if you have the discipline to pay off your monthly bill. If you are more of a spendthrift than a saver, don’t even venture down that road. Even having a credit card on hand for “emergencies” is risky. For the spenders out there, an emergency may extend to not having the right dress for a dinner date or the latest phone handset.
At the end of the day, credit cards are there to enhance your finances, not damage them further, so make sure you compare all the options on the market to find a card to suit your needs.