FINANCE TIP OF THE DAY
Can you afford your loan?!
Know the quantity of loan you can afford. The banks may sanction loan based on your income but you should look at your monthly expenditure and see if you can afford the maximum that banks offer. As a thumb rule, remember not to let your credit exceed 40% of your income!
Credit Cards – Do you need to flash many?
Credit card companies come up with tempting card offers for investors albeit now more cautiously after the financial markets turmoil, by offering freebies such as life time free credit among other things. Customers already possessing credit cards often find themselves taking up such offers and ending up with multiple credit cards. The moot question here is, should you be content with having one credit card or does it make sense to have multiple credit cards and if so, then how many are enough?
Let’s understand what the benefits and pitfalls of having multiple credit cards could be.
Why would one need more than one credit card?
Credit Limit: If you feel that your credit limit on the single card doesn’t suffice, then you may need more than one card. Nevertheless, remember, if you have a good payment history, credit card companies reward you by enhancing your credit limit which may eliminate the need to go in for one extra card. So make sure you make your credit card payments in time- the benefits are manifold. You credit score will not get adversely impacted, you will not have to pay high interest on your card and credit card companies may enhance your credit limit.
Convenience: At times, merchants do not accept all cards i.e. some may accept only Visa or MasterCard. So if you have only one card, you may be inconvenienced. Also sometimes your card may get rejected for technical and other reasons. So a back up is required.
Fraud Protection: If you use your credit card for online transactions, for fraud protection, you may find it to useful to use only one card for such purpose and restrict the credit limit on it, so that even if your card details are hacked, the extent of damage is limited.
Benefit oriented cards: There are some cards which provide maximum privileges or a good deal if used for a particular purpose such as petrol purchases or air miles. You may want to take advantage of the same and therefore have a card for that purpose only.
What are the drawbacks of having multiple cards?
Credit history: Maintaining a clean credit history is becoming increasingly important with credit bureaus like CIBIL tracking your payment. The probability of missing a payment date is higher if you posses several credit cards as you will have to keep track of the payment date of each of the credit cards. If you renege on your payments, your credit history will be get affected which will adversely impact your credit score and your ability to get loans in the future. Multiple credit cards requires you be to very responsible.
Purchasing Power: Credit cards give you the purchasing power as you do not need money in your account to make a purchase. If you are impulsive, then having multiple cards can prove to be a recipe for disaster as you may spend without thinking of your repayment capability. That will result in postponement of payments and over a period of time, accumulate into a large debt.
Effort: Managing multiple credit cards is an effort because it requires a proper schedule, which you need to figure out and keep a tab on. You need to keep track of the payment dates, the interest free period and the credit limit.
There is no clear cut method that determines how many cards are enough. One may not suffice, because you need a back up just in case your credit card is not getting accepted for whatever reason and also for various other reasons as stated above. But at the same time, having too many cards requires you to act responsibly so that you do not tarnish your credit history and find yourself in a financial mess. So the next time you receive a call for a credit card, ask yourself whether it adds any value for you and whether you will be able to manage it responsibly!
Points to remember:
- It is advisable to make full payment instead of a minimum payment on your credit card bill within the free credit period to avoid interest costs.
- There could be other hidden charges that a credit card company may charge like over the limit fees, transaction fees etc.