Credit Cards: Friend or Enemy?
What is a credit card?
A credit card is a payment tool provided by financial institutions. However, only a few aware that credit card is a form of a loan. This is because the card provider, usually a bank, pays in advance every time you swipe your card.
Like all other loans, the credit card charged an interest. Usually, the interest rate is around 18 percent per year, which is equal to 1.5% per month. Banks will determine the credit limit you are entitled to, along with the terms and conditions of your credit card. As a credit card holder, you might also enjoy services such as balance transfers and cash advances. However, the interest rate charged differs between the services. For example, cash advances usually impose higher interest than any other service.
At the end of every month, you will receive your credit card statement, which will itemize your purchases and the outstanding amount you need to pay. The statement will also state the due date for the payment and the minimum amount you must pay for that month to keep your card activated.
The debt traps
However, a credit card is set to become your source of debt if you fail to manage it wisely. The debt trap starts when you only pay the minimum monthly amount to keep using the card. Not realizing that paying the minimum will only make your debt grow, you keep using the card for more purchases.
The minimum monthly payment is usually between 2% to 5% of what you have charged to your credit card, or RM50, or whichever amount is highest. The one crucial thing that many credit card providers have shared with you in their terms and conditions and needs to be addressed by the credit card user is that the debt not paid within the stipulated period will be compounded as long as it is not repaid.
How frequent is the compounding? Some of the credit card providers will compound it daily and some weekly. As such, paying the minimum and continuing to use the card will set the gravest debt trap, in which, once you realize, it might be too late. You will also be slapped with late payment charges which will increase the amount of your debt if you continue to defer your payments.
Managing credit card repayment
Although it may seem scary, you can actually manage your card, so it becomes your best friend. The only thing you must remember is that the card is not to replace your cash but to be your cash in terms of the card so that you do not have to bring your money everywhere you go.
As such, before swiping the card, ensure you have enough money in your bank account to pay for all the purchases within the stipulated free interest period, which is usually before the payment due date stated in the credit card statement.
This grace period is crucial as it allows you to use the credit card free of charge and, at the same time, enjoy the benefit in terms of points and discounts. You can also choose payment options such as 6 months interest rate free, provided that you can pay the monthly payment without fail, as your debt will be compounded if you fail to do so.
These payment options will allow you to invest the money you are supposed to pay when you buy the item. However, you are only advised to use this payment option for the big purchase.
Credit card also offers benefits such as rebates and points. It helps you save money; for example, you can enjoy special prices through promotions and discounts when paying with a credit card. The points you accumulate can also be redeemed to get something you desire at a lower price or, if you have enough points, to redeem it free of charge.
How can credit cards be your best friend?
The most important thing is that you must realize that a credit card is not your cash replacement. As pointed out earlier, use your credit card only when you are sure that you have enough money to enjoy the benefit of the free interest grace period.
Be a wise credit card user and enjoy its benefits, as it will help you manage your money wisely, and more importantly, you can travel and shop safely without the need to bring too much cash. But remember, paying only the minimum amount is the biggest mistake in managing credit cards. As such, you must avoid it at all costs to prevent your debt from snowballing and pulling you into the trap without you ever realizing it.
Credit cards can benefit you and provide convenience, especially by easing payment processes and the various discounts they offer. The key is making full payment for all purchases to ensure that your credit rating is always on the higher score.
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