Credit cards are not inherently bad. If used responsibly, they can be a saviour in times of need.
If you have experienced the brunt of the consequences of using your credit card without planning, you may feel aversion for credit cards, and rightly so. Credit card is one of the most abused debt instruments and has caused many individuals to break down.
Many times when you are in bad credit state, financial experts will advise you to stay away from credit cards. That people usually turn to a financial planner when the harm is already done, is the sad part. If you have got a credit card, instead of becoming a victim, use it in ways which can help you leverage it to your advantage.
Never associate credit card with financial freedom
This is the first step to make credit cards work for you. Do not think them as the extension to your existing income.
Credit cards are credits and they should be used like that. The problem with average credit card users is that it makes them feel financially free.
It is easy to take out a credit card and swipe them right and left. However, you need to carefully plan your spending, before you go ahead and swipe that smart plastic card to purchase something you don’t really need.
Make full payments
To make sure that your credit card is working for your advantage, you will have to ensure that at the end of your bill cycle, you are completely free of debt on your card. This means, paying the amount in full.
Credit cards charge you higher interest rates. To avoid paying interest, make your credit card payment in full.
If the amount is higher, you can make several small payments throughout the month to complete it well before time.
Make timely payments
The late payment fee on your credit card can be exorbitant. To avoid paying the late fee, make sure that your payments are always timely.
Moreover, your repayment history plays a major role in your credit score.
If you are not making timely payments, it will reflect poorly on your credit scores, which in turn can limit the amount of credit available to you.
If you find it difficult to remember the payment dates of all the credit cards you have, request the issuers to change the payment date on the same day of the month. You can also set ECS payments so that the bill is paid automatically from your bank account on the given date.
Keep the credit utilization ratio low
There is something called the credit utilisation ratio, that affects your overall credit health. A credit utilisation ratio is calculated simply by dividing your total credit balance with the amount of credit available to you.
A higher credit utilisation ratio is harmful to your credit health over time and makes you a risky borrower, even if your repayment history is strong.
The lenders are more likely to reject your fresh credit card or loan application, or charge a higher interest rate from you, based on your high utilisation ratio. As a rule of thumb keep your utilisation ratio below 30 per cent.
Select cards with extra reward and use them wisely
Before selecting a credit card, make sure to know about all their reward features and select the one that offers you an array of rewards that are useful for you.
If your credit card is offering you discount on fuel and you do not use a vehicle, the reward is meaningless to you. Shop around a bit before selecting a credit card and take advantage of the rewards as much as you can.
Photograph: Sunil/Creative Commons
The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.