Credit Card – it is very easy to use but very dangerous if you have misused it. A credit card can be a valuable tool if you know how to use it properly. Likewise, using credit cards irresponsibly can lead to a world of hurt.
The way you use credit can impact your financial life, and even your ability to get other loans later. The key to having credit work for you is responsible management.
Here are 12 tips for managing credit responsibly:
1. Live within your means: This is the number one rule of successful personal finance, as well as credit management. Make sure that you can afford what you buy – even when you buy on credit. Sometimes we are purchasing more items in the mall or shopping centre due to the credit facility provided by the credit card. Just imagine for a second, can I repay the amount within the stipulated period. When you are purchasing anything on credit card, please remember that you are taking a loan. You want to be able to afford the loan payments, and before you buy anything with a credit card, save up for It so you can pay off the balance.
A credit card should be used carefully. Frivolous purchases can lead to debt. Credit cards can be used in emergency situations, such as a mobile phone bill that’s due before your next payday or car repair or medical bill but not as an Emergency fund for your entire financial life. Use the credit card as a temporary loan to yourself, and then pay back the amount as soon as you can to decrease or avoid interest charges altogether.
2. Track your spending: Do you keep track of the credit card spending pattern? Most Indians do not feel to keep track of the credit card spending. Keep track of where you spend your money. This way, you will be less likely to overdraw your account. It’s also a good idea to track your credit card spending as well, so that you avoid going over your limit.
3. Have a plan: Make a Financial Plan for you and family. You should have a plan for your money. You can even have a plan for your credit cards. Budgeting your money can help you pay your loans down faster, avoid carrying a credit card balance, and keep you out of debt.
Know how much you spend each month by creating a budget and getting into the habit of adjusting your spending so your bills do not exceed your income.
Use your credit card as a compliment to your budget. If you’re disciplined enough, you can use a credit card as a compliment to your budget. This strategy usually involves creating a written budget, then using your credit card for purchases until you work through your predetermined spending limits. This is a great way to earn rewards for purchases you’d be making anyway, and to gain certain protections that only credit offers.
4. Make on time payments: Never skip a payment. Pay your bill every month, even if the minimum payment is all you can afford. The most important factor in your credit score is your payment history. If you miss payments, or are habitually late, that will be reflected in your score. This can mean added fees, late fee, penalty interest rate, a lower credit score, a negative impact to your credit score and higher interest rates when you apply for loans.
5. Keep your debt level low: Use the card for needs, not wants. While you do need to borrow for some things, such as a home, car or education, it is important to try to borrow only what you need. Try to borrow as little as possible. Your total debt payments should be no more than 35% of your monthly income for a better credit score.
Know your limits. You are worried that you might overspend, ask your credit card company to lower your credit limit to something you know you can manage on a monthly basis. They should be more than happy to help since they ultimately want you to pay the money back, and they can often make the credit limit change effective immediately. Not everyone wants a Rs. 10,000, Rs.5,000, or even Rs 3,000 limit on their cards, and that’s okay.
6. Don’t close old accounts: Sometimes, it’s tempting to close an older credit account. However, the length of your credit history matters. A longer credit history can help your credit score, and help you appear more responsible. Part of good credit management is making sure that your score is improved upon.
7. Have different types of credit accounts: One of the factors considered by lenders when it comes to your credit is the different types of accounts you have had in the past. A mix of revolving accounts and installment accounts is preferred. Installment accounts are those, like mortgages and car loans, show you can make a fixed payment over time (and do it on time). Revolving accounts, like credit cards, show that you can handle paying down your debt periodically, without going over your limit.
8. Avoid certain loans: While some variety in credit accounts is desirable, there are certain loans that appear suspicious and negative when viewed by lenders. These loans include payday loans and car title loans. When possible, avoid these types of loans. Just check the credit card interest rates – 3.5 % per month (42% per annum)
9. Monitor your bank accounts: Monitor your bank accounts and credit card accounts. Reconcile your statements regularly to make sure your records match. You can also check your accounts online to catch fraudulent charges sooner.
10. Cash advance: This is one of the facilities of a credit card that should only be used as a last resort and not as a regular feature. The interest rates applicable on cash advances are the highest amounting to about 42 per cent per annum in most cases. This interest is calculated right from the time you take the money out and continues to be compounded till such time the entire amount is cleared. Any slip ups in payment will lead to incurring huge interest payments. While this facility is a standby measure for emergency money its usage must be done with utmost care. The debit card is much more preferable for taking out money when you need as it is your money and entails no interest on the withdrawal.
11. Check your credit report regularly and fix mistakes: Managing your credit effectively requires that you keep up with what is happening in your credit file. You are entitled to a free copy of your credit report when you write in under certain conditions. Make sure that there are no fraudulent accounts, and that errors are fixed. Inaccuracies can lead to lower credit.
12. Terms and conditions of the Card: Understand all the terms of your card and any new cards for which you may apply. Make sure you know when your payment is due, as well as the interest rates, the fees and the events that may trigger them.
Using your credit card responsibly when you are in a market –a mall or a shopping centre can help set a strong financial foundation for future borrowing. By establishing and maintaining a positive history, you increase your chances of borrowing money in the future at more favorable terms and conditions.
The Most Important Message for Consumers
Know where your money is going. Financial freedom can provide huge benefits not only financially, but personally and emotionally. Money can touch all aspects of your life.
“Stand up, be bold, and take the blame on your own shoulders. Do not go about throwing mud at other; for all the faults you suffer from, you are the sole and only cause.” ~Swami Vivekananda
I am a CERTIFIED FINANCIAL PLANNERCM , CHARTERED WEALTH MANAGER® . For the moment, I have shared my experience growing up with you because it had a tremendous impact on how I do what I do. If you have a question about your own financial situation please connect with me. I’d be delighted to try to be of service.
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