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Credit Card Advice To Manage
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What is a credit card anyway?
Cards you will normally carry are either a debit card or a credit card. Lets talk about both to see the difference.
The Debit Card - this card works very similar to a cheque. You pay for something using your debit card and the money comes straight out of your bank account. You are not charged any fee for using the card and there is no interest to pay, just like a cheque.
The Credit Cards - this is like running up a bill. Every time you use the card it adds the amount to a running bill, then at the end of the month the bank asks you to pay it. However you can either pay off the whole amount all at once or pay off a portion of the amount, the remaining bill will start to incur interest charges until it is paid off. By not paying off the full amount you will be paying off more than you originally borrowed on the card. So my credit card advice is, if possible, pay off what you owe every month to avoid interest fees building up.
The interest rate of a credit card is set by the provider of that card i.e. the bank that issued the card.
The companies that actually handle the transaction do not make any charges to you and the only difference between them is whether or not they are accepted in the country or shop you are using. Two of the most well known transaction companies are Visa and MasterCard.
My credit card advice is to make sure that your credit card is accepted where you usually shop the most. If you are travelling abroad check with your transaction company before you go, it may be necessary to take out another credit card just for your trip if your card has limited use in your destination and this may take several weeks to set up, so plan ahead.
The
benefits and disadvantages of a credit card
If you use a credit card in a frugal way it has many advantages over a debit card.
- It delays actual payment, allowing you to manage your money.
- It provides payment protection and sometimes protection on your goods.
- Some have reward schemes the more you use the card.
However the main disadvantages of a credit card is:
The interest you pay on outstanding balances is very high and if you do not stay on top of your card usage you can quickly build up a very expensive debt. So my credit card advice is to always set yourself a limit on your credit card usage and once that limit is reached, put your card away until it is paid off. The worst thing you can do is to keep your balance near to this limit as you will be incurring ever increasing interest charges which may mean that you are only paying off the interest rather than the actual bill.
What charges are there on credit cards?
The main way the lenders make their money from credit cards is the interest earned on outstanding balances. This is why they are always offering you higher and higher credit limits, hoping that you will spend up to that limit and have to pay it off slowly.
However there are a few other ways they make money from credit cards.
- Fines - if you do not make a payment on time every month they will add a fine to your bill. These fines vary from provider to provider but they are certainly not small and are definitely something you want to avoid. My credit card advice to avoid this is to set up a direct debit to pay off the minimum amount every month in time for the deadline. Follow this up with sending a cheque if you can, to pay some more off, this way at least you would have made sure you won't ever be caught with a late payment fine.
- Insurance policies - Every credit card provider will offer you insurance to either protect your card if it is stolen or in the event that you become ill and are no longer able to pay off your debts. By buying this protection with your card it will be costing you much more than if you cover yourself with a separate insurance policy.
- Transaction fees - these you won't pay yourself; instead the retailer who is allowing you to pay for your goods with a credit card has to pay a very small percentage to the credit card company. However, we do pay for it indirectly, as the retailer has to increase their costs to cover this fee. Ah, there's no escape!
The credit card advice golden rules
Here is a quick summary of things to think about when using a credit card. First put your frugal head on:
- Always check regularly to see if there are better offers on the market. Sticking with one card could be losing you money. Seek credit card advice from your local banks and online to see the latest interest rates.
- Move a balance to another credit card if they are offering a fixed term of interest free on transferred balances. Note, if you do this, cut the card up and only use the account to pay off that debt, otherwise you will be charged interest on your new purchases and this can spiral.
- If you pay off your balance every month then consider using a credit card that offers rewards. The rewards are great like money off goods etc. But these cards are not good for those who need to borrow on their credit card as the interest will far out cost the rewards.
- When travelling abroad try to use travellers cheques that you have purchased before you go. Using a credit card or debit card abroad to obtain cash can have extra hidden costs, which are added to your balance.
- Use credit cards only when you have to. The frugal lifestyle is better lived without debt and worry, and the credit card although your friend in times of need, can also be your worst enemy if used carelessly.
This credit card advice is designed to be used as a starting point for your discovery of the perfect credit card for you. Regulalry check offers made by the banks but also check with online comparison sites, which will have the most up to date rates available at the time.
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