Whether credit cards are useful or harmful depends on the person who uses it. To a prudent spender, a credit card means discounts, cash backs, reward points, easy and interest-free credit. To an irresponsible spender or someone who is struggling with cash flows, credit card may mean high interest rates, minimum payments, penal charges and a debt trap. Which one are you? I hope you belong to the first category. In this post, we look at some of the habits that prudent spenders should avoid to get the best out of their credit cards.
#1 Not paying bills on time. This has been oft-repeated on this website. Credit card debt is the most expensive debt in the formal finance sector. Interest cost along with penal charges and service tax can easily shoot up the cost of debt to over 40% p.a. Not paying bills on time is just not acceptable. Paying the minimum amount due is also not a good idea either. This may compromise your CIBIL score too. If you are stuck with such high cost debt, try taking a balance transfer or a personal loan to square off credit card debt. In some cases, you may forget to pay the bill despite having money in your account. This is criminal. Opt for auto-debit if you forget bill payments on regular basis. Credit cards are not for those who want to live beyond their means. Such people will soon find themselves in financial ruins.
#2 Not availing rewards point/cash backs/discounts to the hilt. Recently, during a 4 day sale on Amazon, there was a cash back offer for Citibank Credit Card or debit card holders. There was 15% cash back for app purchases and 10% cash back for purchases on computers. Unless you are not savvy with mobile apps, it makes greater sense to purchase on the mobile app than on your laptop. If you had purchase an item worth Rs 10,000 on Amazon mobile app during those 4 days, effective cost for you will be only Rs 8,500. You need to go through terms and conditions too. For instance, for you to avail the offer, the purchase amount had to be Rs 5,000 in a single transaction. Therefore, if your transaction amount is only Rs 4,500, there will be no cash back. I am not saying that you must purchase anything just to meet the threshold. However, it is better to make a single purchase of Rs 5,000 than two purchases of Rs 2,500.
You can plan for it. Such sales are announced well in advance. Therefore, if you have been planning to purchase something, do look out for such sales. And it does not end here. You may get such discounts while booking travel tickets and purchasing an electronic item. Many restaurants give discounts on specific cards. Ask for such discounts before making the payment. Quite possible you had cards from HDFC and ICICI. You offered your HDFC card for payment while the restaurant offered discount on ICICI card. Nothing wrong in asking for discount. If you hold two or more cards, figure out if there is a way to earn more rewards without overshooting your budget or overspending. For instance, American Express offers 1000 additional points if you make 4 purchases of Rs 1,000 or more. Now, if you already have such spending pattern, it is better to use the same card so that you maximize your reward points.
#3 Having too many cards. Continuing with the above point, offers may be on different credit cards. Today, it is on Citibank cards. Next time, it may on American Express cards. Flipkart may offer on HDFC and SBI cards. That does not mean you collect cards from all the major lenders so that you do not miss the opportunity. If you miss a deal, so be it. Managing too many credit cards can be problem. You may miss a payment or two.
When you apply for a credit card, the bank makes a hard enquiry with the credit bureaus. Too many hard enquiries can be considered credit hungry behavior and your credit score may suffer. If you are too keen not to miss out on a deal, you can ask a friend to make payment on your behalf and transfer the money to his/her bank account.
#4 Not using rewards point wisely. Many banks allow you to use your rewards points to make a purchase. For instance, American Express considers 4 points equivalent of 1 rupee. Therefore, if you want to make payment of Rs 500 item, you need to use 2,000 points for it. However, once you have a sizeable number of points, you can get much better deals. For instance, you can use 18,000 reward points for a statement credit of Rs 7,500 i.e. 2.4 points/rupee. Much better than 4 points/rupee. For the same 18,000 reward points, you can purchase stay at luxury hotel for a few days. If you were actually planning to go to that location, stay for a few days at the hotel may have cost you way more than Rs 7,500. So, you need to see what works out the best for you.
#5 Not taking full benefit of interest free credit period. This one is for mathematicians. Unless you are a heavy spender, the effect is likely to be very low. Suppose, you have two credit cards. Card 1 has statement date of 15th of every month and due date of 1st of next month. Card 2 is exactly the reverse. Statement date is 1st of every month and the due date is 15th of every month. To extend the interest free credit period, spend from 1st till 15th on card 2 and from 16th till 30th or 31st on Card 2.
A Word of Caution
I have listed out many ways in which you can use your credit cards effectively. These measures can actually result in savings. However, do not go overboard. Always remember the following.
- Do not spend more than you can afford to.
- Do not spend meaninglessly. A credit gives you the power. You need to use it responsibly.
- Look out for discounts and good deals on cards but do not chase them. Spending on items you don’t really need just to get more reward points is quite dumb.
As Warren Buffet, one of world’s most renowned value investor, says “If you keep buying things you do not need, soon you will have sell things that you need.”