Cathleen Moreno
We can’t stress enough how important it is to know how to handle your credit cards properly, from watching out for credit card fraud and phishing scams to unknowingly paying only the interest thus compounding the interest on the balance.
Here’s an article that is written by Cathleen Moreno of Minimalist Misis about things you should never do with your credit card.
As of yesterday, I received two black credit cards separately in the mail in just a span of one week. While I admit that the finance geek inside me finds this very exciting, I now have on my plate the daunting task of deciding which of my two older cards don’t let me maximize the benefits suited to my lifestyle and therefore have to let go. So before I go do that, let me share with you the 9 things you should never do with your credit card. This post serves mainly to those who already own a card or two, but it also works to help enlighten anyone who’s interested in getting one.
Fail to keep track of all your transactions
This first one is an obvious tip but is most often neglected. Basically, you try to keep your credit card safe because you want to prevent fraudsters from accessing your credit line. The way to know for sure that no one else is using your account is to keep track of all your transactions. It’s always better to be safe than end up paying more for someone else’s purchases.
How to avoid this trap: Keep all charge slips so that you can verify each transaction when your monthly statement comes. If sorting small papers and receipts is not your thing, you can download a personal finance management application on your mobile phone where you can list all your transactions.
Treat your credit card as free money
A credit card can give you a false sense of liquidity. Having a sudden high credit limit can be very exciting, but if you’re not careful, you’ll be spending way over your budget. Don’t treat your credit limit as free money. Always remember that you don’t own the cash, you have zero balance on that card. Having a credit card is not an opportunity for you live like a one-day millionaire, but it’s a responsibility that needs to be taken seriously.
How to avoid this trap: Just like in handling your personal cash and investments, you need to condition your mind on what a credit card actually is and how you would use that loan or debt it to your advantage. Equip yourself with the proper mindset by reading and learning. It also helps if you master the art of saving money and budgeting first before getting any form of credit.
Get cash advances
Your credit card works not only by swiping or tapping for purchases but can be a tool to get an advanced cash loan via ATMs anytime and anywhere. However, in doing so, you are more likely to wreak havoc on your finances. Depending on which credit card you use, the companies usually give you a grace period of 15 to 30 days to pay your “loan” without charging you any interest. But if you use the cash advance feature, you automatically pay a charge of 5-6% of your loan amount, or Php300-500, whichever is higher. Furthermore, the company will flag you as a potentially bad debtor because if you borrow money in cash, they don’t know how you would spend it or what you would do with it. With regular credit card swiping, they can study your spending habits and understand how most likely you’ll pay them back.
How to avoid this trap: Plan your budget within your income and stick to it. Build your emergency fund so that you’ll have some moolah when you need it.
Avail credit to cash loans
“Do you have the cash for your summer travel?” or “Maybe you need some cash for your last-minute holiday shopping?” These are the lines that credit card agents from foreign banks usually tell me, in hopes of persuading me to avail the credit to cash loan. Sometimes, the banks just flat out tell you of their “limited” loan offer with just 0.75% monthly add-on rate. But really take the time to think about it and you’ll see that after you’ve paid off your loan in 2 years’ time, you would have paid the company 50% more than what you owed, to begin with.
How to avoid this trap: There must something in their marketing that makes you want to avail of the loan even when it’s not necessary. Take a deep breath and try to understand what is it that you really need in life. Travel and gifts for loved ones need not be expensive to the point of loaning some cash for it. Look for an alternative that’s cheaper, or maybe even free.
Miss monthly payments then pay interest and other charges
This is mostly where the credit cards get their bad reps from, and with good reason. But you have to understand that this nonsense notoriety could easily have been avoided had the persons using them paid their transactions in full every billing cycle before the due date. Don’t think paying the minimum amount due is better than not paying anything at all. It’s just not.
How to avoid this trap: Make it a point to pay your balance in full every month. Subscribe your account to an online banking facility where you can easily make payments without going to the brick-and-mortar bank or payment centers. Mark your calendar when the due date falls. Understand the contents of a credit card statement here.
Use your credit card when traveling abroad
Unless your card has the dual currency feature, it’s probably best to leave your Philippine-issued credit card at home when traveling abroad, save for emergency purposes. Aside from the foreign currency exchange rate, which potentially could be higher around the time of your purchase, when you use your card outside the country you are automatically charged a foreign transaction service fee of 2-5%, depending on your bank.
How to avoid this trap: Plan your vacation and bring enough cash as you deem necessary. It’s also best to pay for your booked accommodations in advance to avoid having to use your card on foreign land.
Max out your credit limit
At most, you should be mindful to keep your credit utilization below 30%. If you own multiple cards, simply add all your limits to get your total credit limit. You get your total credit utilization by dividing your average monthly spend to your total credit limit. Never max out your credit card lest you want to pay Php500 per month. Credit limit pertains not only to the actual transactions but includes the interest charges as well.
How to avoid this trap: If you feel that the limit given to you will not suffice under any normal circumstance, such as when you use your card for business transactions, you can always ask your bank to increase the limit and provide the necessary documents for approval.
Earn rewards points while carrying balance
We’ve all been there – getting a loyalty card to a mall, supermarket, clothing shop and others when you don’t really subscribe to the brand that much. The same goes for choosing a credit card. You all know the catch. For every Php30.00 spend, you earn 1 reward point. For every grocery purchase, you get 5% cash back. For a Php20,000.00 accumulated or single purchase, you get a free flight to Hong Kong. But it’s not really a reward, a cash back or a free stuff when you pay for an interest charge, a late payment charge, an over-limit fee, a foreign currency transaction fee. Well, you get what I mean.
How to avoid this trap: Understanding your lifestyle and the type of reward you would enjoy the most is crucial in identifying what kind of card you would most benefit from. But if you can’t manage to pay in full before the due date, maybe it’s best to stick with a cash payment and a regular mall loyalty card in the meantime.
Pay annual fee
Lastly, never pay for an annual membership fee ever again. Trust me, it can be done. I’ve come to own at least ten credit cards in my lifetime, albeit not all at the same time, but I have never paid even a single centavo to maintain my bank relationship. When you pay for any fee, this one included, the perks you enjoy are not really rewards or rebates.
How to avoid this trap: Simply do all the aforementioned tips and you’ll find it incredibly easy to request your bank to waive your annual membership fee. Always remember that it’s a two-way street. Show your bank that you are a responsible borrower, and the bank will do everything it can to retain you as their client.
