Credit cards offer open-ended loans because these are open lines of credit. You can borrow money against your credit card at the time of purchase for paying bills, but the loan is quite different from traditional loans. For money borrowed against credit cards, there is no fixed time for repayment, and you can choose between three options of repayment every month – pay a minimum amount, make a partial payment or pay off the entire balance. The flexibility of making payments according to the convenience of credit card holders is a great attraction. However, the choice of payment influences your credit score because paying off balances in full and on time shows that you are a responsible borrower and improves your credit score.
The interest charged on credit card balance is applicable after a grace period varying between 20-45 days depending on the terms offered by the credit card company or bank. Users get the opportunity to avail interest-free credit provided they make payment of the credit card bills on time. As long as you keep paying the full amount charged in the previous month against the credit card, you can enjoy credit free interest for that amount. However, inability to pay the total amount would convert the outstanding balance into revolving credit that attracts finance charges or interest on the outstanding amount every month. Some credit cards attract annual fees, and credit card companies even offer cards with no fees. No matter which kind of credit card you are using, the operational modalities are the same.
Avoid the trap of minimum payment
The option of making the minimum payment for credit card balance might apparently appear very attractive, but in practice, it is just the opposite because it puts card users in a tight spot. Although you can avoid penalties by paying only 2% to 5%of the outstanding balance, the credit card companies or banks charge very high interest on the unpaid balance which keeps growing until you can wipe off the balance. On the other hand, even if you are making the minimum payment, you can keep borrowing within the permissible credit limit which can lead to increased debt that attracts more interest. In the end, you keep staring at the spiraling balance with added interest and find yourself entangled in a debt trap.
Getting out from the Debt Trap
One way of getting out of the debt trap is to look for opportunities of transferring the balance to a new credit card that offers 0% interest for a specified period. Balance transfer credit cards allow users to transfer outstanding balance from other credit cards to the new card and give a chance of clearing the balance without any interest. It is a lifeline that any responsible user would like to make the best use of to make good of faltering in making a full payment earlier. Credit card companies expect that despite the zero-interest offer, you would reach a stage when you start paying interest to them.
It now becomes clear that to avoid the pitfalls of paying high interest for credit card debts you must use credit cards responsibly and follow a plan for getting out of debt. You must have specific objectives for using credit cards and work towards attaining those goals instead of random borrowing without any plan for repayment. Undisciplined borrowing against credit card is the worst thing that can happen to credit card holders.
Here are some tips for using a credit card responsibly.
Credit building with timely payments
Your credit card score depends on your entire credit history that includes borrowing and repayment from all sources including loans and credit cards. You must make timely payments against all types of borrowings and not credit cards only even though the latter gives you the best opportunity for building credit. If your goal is to build credit by using credit cards, then keep charging the credit card for some amount every month and keep paying the full amount on time. Timely payment ensures that you do not pay any interest on the balance amount and the record of timely payment improves the credit score after some time.
Earn rewards and cash back
Some people might consider earning cash back and travel rewards for credit card usage as their goal. To achieve the goal, you must use the right type of credit card that provides the benefits you are looking for. To maximize cash back or rewards, use several credit cards that offer the benefits and start spending every month by calculating the gains that accrue from it. However, you must never spend more than what you can afford and ensure timely payment of balances in full every month. Unless you can avoid paying interest on the outstanding balance, the purpose of gaining from rewards and cash back will not work at all.
Monitor your discretionary spending
You can use the credit card as a tool for monitoring your cash flow by keeping an eye on the spending pattern. If you use one card mostly then, you can track spending and payment by viewing the account online. Besides checking the spending values, you can also track the purpose of the expenditure by looking at the spending categories that help to identify between necessary spending and discretionary spending. This should help to manage the spending better as you can cut down on discretionary spending to keep debt under control.
Plan for large purchases with prolonged payment
The credit card is a valuable source for finance, and you can plan for some big purchase by using a credit card preferably with zero interest. Just be sure that you can pay off the balance within the interest-free period. Even if you must pay interest, you can match it with some personal loan, and if it works out better, it can help fulfill your wish of making the big purchase without worrying about the availability of funds. It is all about proper planning and cash flow management by using credit cards for more flexibility.
Unless compelled, avoid borrowing money from credit card at regular interest.
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