The little piece of plastic that is a credit card has slowly changed the way people spend and transact business. With revolving credit and deferred payments, as well as a host of other benefits, credit cards have become the dominant tool for both businesses as well as individuals.
However, there is an insidious side to the rosy picture that a credit card paints, with the key one being overspending.
Credit cards can be a way to better manage one’s spending or they can mark the beginning of a spiral into debt and stress. Managing one’s spending on a credit card is the key to ensure that you reap the benefits that credit cards offer without falling prey to its disadvantages.
While all of us receive a monthly credit card statement, very few of us give it more than just a cursory glance. Reading through your monthly credit card statement is an important step in your battle against credit defaulting, as it could leave you vulnerable to fraudulent charges. While the cardholder is not liable to pay charges for fraudulent transactions made on his/her card, you as the cardholder would need to bring these transactions to the notice of your bank or else you’ll end up paying for purchases you haven’t made.
Setting up an autopay or standing order for your credit card bill is also a bad idea, as you are unaware of the amount that you’re spending or what you’re spending on.
A credit card monthly statement provides a summary of all purchases made on the card, which can be used to track your spending, enabling you to identify and take inventory of where your money was spent. This makes the most difficult part of budgeting, which is tracking your spending pattern, simple, since it requires you to merely look through your card statement. Since the most important way to rein in your credit card spends is by identifying necessary and frivolous purchases made on your card, this will enable you to pinpoint the purchases that were impulse buys, helping you avoid such purchases in future.
Most credit cards come with an interest-free period, which ranges between 45-60 days. Purchases made during this period will not attract interest if the entire amount is paid off by the due date. Depending on the type of card you opt for, the interest-free period could be up to 60 days or it could be 45 days. By paying off all that you owe by the due date, instead of only paying the minimum due, you will avoid paying interest on the balance amount. With interest rates on credit card balances rising, this is the easiest way to stave off the credit card debt and ensure you’re using your card’s interest-free period to the fullest.
If you plan on making a large purchase, for example, a refrigerator, putting the entire amount on your credit card might seem like a good idea since you will be able to defer the payment for a while. While this is a good idea, staggering your purchase so as to put in the next billing cycle is an even better idea, since this will give you more time to pay it off.
For example, if your billing cycle is from the 10th of December to the 9th of January, with the bill due by the 20th of January, try to make your purchase after the 10th of January. In this way, the amount will be added to your bill that is due by the 20th of February, giving you ample time to marshal the cash needed to pay off the amount.
This is especially important if you wish to avoid paying interest on your outstanding due.
Afraid to see a large amount of money go out of your account towards paying your credit card bill each time the payment due date rolls around? Instead of making one lump sum pay-out towards your bill close to your due date, try making smaller payments throughout the billing cycle. For example, if you make purchases worth Rs.25,000 on your credit card and the amount is due by the 20th of January, start by making small payments of, perhaps, Rs.5,000 each throughout the billing cycle (i.e., from 10th December to 20th January). This will reduce the amount you owe at the time the bill is due and you will also be aware of the amount you’re spending on your card.
Most of us receive SMS alerts when we swipe our cards at merchant outlets. These SMS alerts can be very useful as they can be used to track your credit card spends on the go, wherever you are. Paying attention to your available credit is a good way to monitor your spending and curb the spendthrift impulse.
Always delineate a budget for purchases and stick to them. If you set a budget of Rs.6,000 for a particular purchase but your credit card allows you to spend up to Rs.15,000, do not confuse the two. Your budget for the purchase is Rs.6,000 only, since that is all you can afford to repay. Spending more would result in you having to shoulder the burden of going over budget when your bill is due, which can throw even the best-planned of budgets for a toss. Your credit limit is the total amount of money you have access to, but it does not reflect your actual buying capacity. Keep to your budget so you’re scrambling for ways to repay your bill, so you can avoid paying hefty interest charges that are associated with revolving credit.
Almost all credit cards are tied to a rewards program, which will award points for purchases of a certain value. Some cards also offer discounts on particular segments, such as double the points on grocery shopping or a cash back on air tickets. Use these offers and promotions when making your purchases as a way to save on your final bill.
With the help of the points mentioned above, you should be able to manage your credit card spending without going overboard, while still maintaining a healthy credit balance.