Tuesday, August 30, 2011

Credit Card Do's and Don'ts

After taking a two week break and having a long four-day holiday, we now come to discuss the credit card. Most people avoid getting one simply because it’s a new thing. People usually fear the unknown. So now I’ve decided to educate you on a financial double-edged sword.

Being cashless is not really a desire of people who don’t have much to go on. However, financial status isn’t the only deterrent to getting a credit card. Fear due to lack of understanding is the most common reason. Now, a credit card can actually help you save a couple of bucks for at least one year if you use it correctly. But, before you get one, there are some things you need to know:
  1. How much money from your budget can you use to completely erase the outstanding balance in one month? This is important as it will allow you to determine the credit limit that you will have. Be careful about this as your bank will extend your credit limit every time you go near this value. Although banks tell you that this is for your convenience, it will allow you to go over your budget and have a gradually enlarging outstanding balance on your credit card. The bank will then get more of your precious money.
  2. What’s your most accessible bank? This will make it easy for you to pay your bills. Get your card from this place.
  3. The shops that you frequent should have a list of cards that they accept. Try to remember what is acceptable. You usually cannot go wrong with a VISA or a Mastercard as their usage is commonplace. If you’re planning to get a different brand, I’ve tried a lot and I’ve also discarded them. These are the two that remain on my list.

Okay! So we now know our credit limit, our favoured bank, and our credit card of choice. Given that you have the proper credentials and requirements to fill out an application, here are the benefits of having a credit card:
  1. Going cashless is nice. Not only does it free up your pockets for other things, having money in small denominations makes it easily expendable. On the other hand, having large denominations is a deadly gamble. Not all shops will accept credit cards, so it helps you develop impulse control (which was the important concept in the previous article) and you still have a hard line to cash should the need to buy something large arise.
  2. Zero interest is a really great thing. It saves you money if you can get something now and pay in instalments. This is the concept of the Time Value of Money. The article I linked to is really comprehensive but the short version is that you want to have a full value item now for less cash now. Sure, eventually you would have paid what it should be worth in three, six, or twelve months but, by then, you would have had the item for the exact same period of time and the credit card company had less.
  3. Swiping your card as payment generates points. Depending on your card, there will usually be benefits attached to it that you can purchase with the points that the card produced. You might think that it will require a large expenditure of money on your part. It actually doesn’t since you can pay off other bills with a credit card and this will earn points as well. Phone, water, electricity, internet, and what-not. All of them provide you service off-the-bat and they may eventually get you a PSP or a trip for two to Boracay for free! Now, being the gamer mentality that I am, I asked around if you can pay off one credit card bill with another and earn points. The answer is a conditional yes. If the card used to pay will be swiped to pay the bill, then perfect. If they’re going to just transfer your balance, that’s a no-no. Some cards add a percentage when accepting balance from some credit cards.
  4. Your credit card bill often comes with a list of places that offers things in exchange for something. If your bill reaches a certain amount, you either get a discount or an additional item. If you buy one thing, then you can get another for free or for an additional amount. Be forewarned. Before you take advantage of an offer, be honest with yourself. Get the freebie only if your actions will produce it. Do not go out of your way and spend extra cash and tell yourself that it was only a small amount to add. Those small amounts add up and the thing you bought was actually cheaper without the “freebie.” Remember, impulse control.

Can you have too many credit cards? Yes, it’s true that you can have too much of a good thing. It’s useless to have a credit limit that you will never reach and one card will usually have more than enough. Remember, you will be paying an annual membership almost every year that this thing is in your possession. Ensure that you check your bill regularly and look for the time when they charge your membership fee. If you want to terminate the card, make sure that you have the bank waive the fee. Ironically, some bank managers can pull strings to waive your membership fee if you’ve been good with your payments or if you used the card sparingly in the past year. Why is this so? They would rather keep you on their string than lose you to another card. It’s good business practice.

Before I close this article, let’s enumerate what you SHOULD NOT DO with a credit card:
  1. Never give a card to a person with poor impulse control. It’s very easy to spot these people a mile away. They’re the ones prone to tantrums and need to have something now. If you really, really, really, really need them to have a card, give them supplementary ones with a small credit limit. But you will regret doing that someday.
  2. Never pay off JUST the minimum balance. Always make sure that your outstanding balance for the month is reduced to zero. This guarantees that the bank will only get money from you when the membership fee becomes due.
  3. Never activate a pre-approved card that you don’t need. In the first place, you don’t need it and there is such a thing as having too many credit cards. Secondly, an activated card will often have hidden charges. Caveat emptor. (That’s Latin for “Buyer beware!”)

I might slip in a different topic next time, just to manage a break between topics. Writing about money too long makes me feel greedy. Remember that your most valuable resource is time. Spend it wisely.

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