Personal Finance advisors never encourage frequent use of credit cards for good reasons. Many of us have spoiled our credit scores by spending recklessly ending up in debt beyond our means. We will take a look at whether the use of credit cards is prudent to satisfy our urgent instinct to buy everything that comes our way. Maybe a few important and relevant observations will enlighten your way for being more circumspect in using the credit cards in future.
Credit cards have some of the best features when it comes to better utilization. However, on the flip side delinquencies in payment of your liabilities can send you off the track easily sending nightmares of bad credit score.
The possibility of an easily affordable credit requirement has made us comfortable when it comes to buying consumer goods or planning holidays. With the arrival of digital marketing, habits of saving first and then buying any household item has given way to compulsive buying.
Whether watching a movie, surfing the internet, or visiting any market place our purchasing instinct gets propagated to place an order immediately. The offers like zero interest installments, 1+1 free products, and other such freebies dolled out by the sellers send an illusion in our mind as if this product will not be available again on such prices again.
Strangely, Personal Loans, Credit cards, and a host of other easy credit options have made our job easier for nothing visibly going out of our wallet. Decisions for getting a Smartphone, new car, holidaying in distant foreign tourist destination, etc. have become instantaneous. Though all these credit options are more or less linked with your credit score the urge to keep ahead of your neighbor compels you to spend more than desired.
Though a strong believer in using a debit card instead of a credit card, I still feel comfortable using credit cards for the reasons explained below. A feel good element prompts me in maintaining clean payment records without falling into the traps laid by the credit card companies.
Positive Features:
- Bonus: Any customer with an excellent credit score is enticed to opt for a new credit card with offers like one-time bonus, gift cards, full waiver of annual card renewal charges, or other such freebies. You must grab such offers maintaining strict discipline in utilizing your cards.
- Rewards Points: Certain credit cards come with reward points which keep accumulating with every spending and you can exchange these points for the recharge cards, gift vouchers on the market platforms. Isn’t it worth considering?
- Frequent Flyer Miles; Starting with American Airlines in ’80s, most of the companies have at least one such card in their kitty nowadays. You get a mile for every journey you undertake with the airline ticket purchased through this card.
- Insurance. Credit cards come with inbuilt accident insurance under the master policy subscribed by the credit card companies.
- Credit score Improvement: Better use of credit cards refixes your credit score for increasing future limits on the credit cards or going for a home loan later on.
TRAPS:
Coming to the Traps for those who are vulnerable and likely to default and damage credit score, these fallacious and confusing offers needs to be spurned:
- The first is about paying only the minimum of your bill. Believe me, it will take you months and years to finish paying off your credit card balance in full. The minimum payment requirement is only around 5% of your balance and other charges keep adding to your woes. If you want to significantly reduce your debts, you have to learn how to pay full amount of the bill rather than going easy on making the minimum payment.
- Another trap is the late payment penalty where you are charged a late fee for even delaying payment by a few hours or even a day. Try to get these charges waived by talking to the companies as they have a tendency to waive off such charges for those customers who pay regularly.
- Balance Transfer: This is modeled and promoted in such a way that the customer feels comfortable without realizing that his interest rate and annual renewal charges have been increased silently. This is just shifting of your liability and frequent use can trap you in debt.
- Cash Withdrawals; Your credit card limit has a sub-limit of cash payments. Be careful of cash advances in credit cards. While this can help you during emergencies, it will be imposed with very high interest rates and transaction charges. If you cannot pay it back immediately, it can accumulate quite easily. Try to search for other options to finance your need. Credit card cash advances should be one of your very last options.
- Please understand that cash withdrawals, Late payment charges, minimum payments or frequent balance transfers have an adverse impact on your credit discipline and history. Better avoid it!
Remedies for Debt Trapped Customers:
- Never go for a settlement. It looks easy and convenient for settling your debt with credit card companies. Please note that credit card companies are very smart and don’t lose money. On the pretext of initiating legal proceedings for recovery of bad debts, they would have the option of adding legal expenses, late payment charges, and inflated interest accruals to demand an abnormally high amount from you. However, while settling your account, they will write-off these charges giving an impression of providing you a big relief. Before accepting such an offer you must negotiate with the company for waivement of charges instead of writing off a particular amount from your bill. Waivement doesn’t impact your credit history!!
- Never Accept Write-off Offer: As explained above, the settlement of your bad debt is a bad option but allowing writing off the debt is worse than the settlement offer. Besides your actual bill, other charges will be included before writing off the whole amount. However, at any point of time in the future, you may be called upon to pay the whole written off amount for improving your credit score. Try to negotiate for payment of debt in easy installments by waiving of the interest/late payment or any other charges.
Conclusion:
Every cardholder enjoys an interest free credit for more than 30 days besides earning free gifts, cash rewards and frequent flyer miles. With desciplined utilization of cards, I think nobody except defaulter stands to lose anything by using credit cards. Don’t you feel gracious to have liquid money in your debit card for the whole month? How effortless it is to keep your credit score moving up by just avoiding the traps.
Partly or fully written-off proposals impairing your credit history must be avoided and instead negotiate for consolidation debt to raise a single debt to pay of multiple debts.
Advice:
Avoid missing payment of credit card bills by setting the payment on auto mode at least a day before the last day of the bill. Will it not be better if you schedule payment of the bill on the day of your salary? I will encourage you to buy all groceries and pay living expenses through credit card only. Whenever you feel an urge to buy anything other than living expenses, try to use the debit card. This will make you feel like falling back on the liquid money in your account and the proven human psychology will not allow you to spend from your reserves.
MoneyXTension: Financial Freedom 