Banking and Finance,  Personal Finance

5 Credit Card Mistakes You Are Making And How To Avoid Them

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Credit Cards have been lifesavers to many of us. If you are new to the term credit card, it simply means a payment card that is given to cardholders to enable them to pay for services.

It is issued to a user based on their assurance to the issuer to pay them for the amounts plus other agreed charges. The service provider or credit card company (usually a bank) creates a revolving account and grants a limit to the cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash advance.

Credit cards offer cash flows during times of need. They are easy to access, usually unsecured, and cheaper as compared to other credit sources.

These simple properties have made them first stop choices when one is scouting for quick debt. Unfortunately, the majority of the cardholders do not take full advantage of credit cards to gain the maximum benefits they offer.

Instead, they misuse the cards without any care ultimately turning the service into one of the most expensive debts in the market. Just like any loan arrangement, credit cards come at a cost.

This cost varies based on the service provider. The costs are in form of interest, fees, and penalties. It is advisable to understand these costs before getting a credit card so as to allow one to manage the card efficiently by avoiding mistakes that may turn out very costly.

To help you manage credit cards better, I have compiled a list of 5 mistakes that you are making and how to avoid these mistakes.

1. You Cash Your Credit Card

There an immense difference between a credit card and a debit card. The difference is mainly in how they are used. We regularly obtain cash by cashing our debit cards at various terminals.

This is because the service is cheaper and convenient. We can also cash our credit cards but it comes at a higher cost. A lot of service providers will not tell you this but it is important that you know.

The charges incurred when cashing a credit card are higher compared to the charges on debit cards. This makes it extremely expensive to use your credit card as a cash tool.

Ideally, credit cards should be used for electronic payments. This method is not only cheaper but also convenient. In some instances, it is actually free because the merchants are the ones who will incur the costs.

Understanding this will go a long way in reducing your costs of maintaining the credit card.

2. You Have Not Understood The Cycle

The credit card cycle simply put is the timeline between last billing and the current billing. Commonly, it is a one-month period. Understanding this cycle guides the payment due date. This is the period between when one is billed and when you are supposed to settle the bill. Why is this important you ask? If you settle the bills fully within the grace period, the charges are interest-free. This in turn amounts to huge savings based on the size of the credit card in the long term.

3. You don’t pay on time

Just like any other debt obligations, credit cards attract penalties on late payments of whatever amount is due.

The debts can grow to huge amounts if one is not careful to pay on time or renegotiate a repayment period (Yes! You can actually do that).

First and foremost, it is advisable for you to understand the conditions and rates that apply in case of default.

If you have a credit card, you need to know when the payment due date is. This is because even a single day in arrears might attract huge penalties.

In the end, these costs will make the credit card very costly to maintain and reduce your ability to grow your income.

Late repayment might also get you listed as a defaulter greatly affecting your credit score which will in return reduce your borrowing potential for any other facility.

4. You don’t Negotiate the interest rate

While there are many different credit cards out there in the market with different conditions rates and fees, most credit cards attract an interest rate annually.

If you are not sure whether you possess a credit card with zero interest or one that charges interest, it would be best to contact your credit card provider to clarify the same.

The credit card interest rates and charges usually vary between the service providers or credit card companies.

Some of these credit card companies have a credit card interest calculator on their websites which can make it easier for you to calculate how much you will repay according to the credit card limit you have.

To avoid paying high amounts on the rates, it is a wise move to see if you can negotiate with the service provider or credit card company.

Some of them are quite flexible and even if they may not reduce the interest rate, they may give you a favorable repayment plan or even offer great credit card deals and or credit card refinancing.

If they accept to any of your requests, it will reduce your payment obligations resulting to increased savings in the long run.

Not all rate negotiations will succeed because they are based on different factors.

These include credit card limit, customer risk level, credit score and macro-economic factors.

If your customer risk level is low and you have a good credit score, then it is easier for you to get a favorable interest rate.

As mentioned earlier, these factors are interconnected hence it is important for the credit card holder to understand them accordingly.

5. You don’t Use the credit card frequently

Credit score is a big factor in awarding credit card limits. What is a credit score you ask? It is a number that depicts someone’s creditworthiness or ability to be advanced for a facility by a financial institution.

Typically, a good credit score means that financial institutions can easily advance you a facility as opposed to a bad credit score.

It originates from the customer’s past debt behavior. The more you use your credit card without defaulting, the more your credit score improves.

This also leads to the growth of one’s borrowing potential. Increased borrowing potential enables one to negotiate the rate and credit card limits that they have been offered.

It also reduces the risk levels for the service provider or credit card company making you a credible borrower. This further encourages the potential to access other types of loans.

From the above, it is possible to make your credit card the cheapest and most convenient type of debt. You just need to understand the details and play by the rules.

Do you have a credit card? What rules do you live by? Has the credit card helped you manage your finances in the long run? Let me know in the comments section below.


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