Credit Cards: Pitfalls to avoid and tips to use

It is easy to understand the growing trend towards using credit cards instead of paper currency. Paying through credit cards is a convenient payment method that allows you to make small or large purchases without having to carry cash on you.  

However, credit cards can also lead you down the path to the costly debt by allowing you to buy goods you can’t afford to pay off. Credit cards are designed for convenience. It is simple to pull out your credit card and pay for a dinner out, the new gadget that you have been eyeing or a particular high-cost brand that you have been dying to own. The easy way that you slip into massive amounts of credit card debt is very similar to falling into a trap. There are things that you can do to help lessen the chances of accumulating large amounts of credit card debt. 

Being a responsible credit card holder requires you to understand and familiarize yourself with common credit card traps & tricks to avoid a cycle of debt.

TRAPS

- Paying the bare minimum

When you pay just the minimum on your credit card, you’re telling your debt, “See you next month.” Credit card issuers tend to set minimum payment requirements at rock-bottom levels. You’ll generally owe either a fixed amount or a percentage of the balance, whichever’s greater. Some cards require you to pay only 1% or 2% of the balance each month, plus any fees and accrued interest. Making these small payments on time will let you avoid late fees, but you won’t make any real progress on paying down your balance. Sometimes, by paying the minimum, you don’t cover even your interest payments and end up paying more interest overall as it takes you longer to pay off your debt. Ideally, you should pay the balance in full each month. If that’s not possible, pay as much as you can to reduce the amount of debt left sitting on your card.

- Cash advances

The option to get cash from your credit card may sound tempting, but it’s nothing like withdrawing cash using your debit card. Cash advances from credit cards are expensive and can easily lure you into a debt trap. It is important to note that;

• interest-free periods do not apply to cash advances.
• exorbitant interest on cash advances applies – approximately as high as 36 percent per annum.
• interests will hit as soon as you withdraw the cash, regardless of your statement date.
• in addition to interests, you may be charged withdrawal fees also. It may be a percentage of the amount you withdraw (the bigger the amount, the bigger the fee) or a flat amount.
• in some cases, you may incur a transaction fee, based on the ATM machine you use.
  
  

- Interest rates

A common slogan for almost all credit cards is “attractive interest rates”. When people hear “only 3 percent interest” they may think it is so cheap as the normal personal loan interest rate range is between 12 percent to 21 percent. The trap is personal loan rate is per annum and credit card loan rate is per month. That means the annual interest rate is the  3 percent times 12 months, which is 36 percent.

- Introductory rates / Cash Back / Miles or points

Most of the credit cards offer low-interest rates for a short period of time to encourage you to sign up. Credit card issuers can increase the interest rate they charge you with little or no warning, so you may suddenly find yourself racking up debt at a faster rate. In some cases, the minimum repayment stays the same, which means you end up paying less of the principal amount while the interest grows.

While some credit cards offer 5 percent cash back, there is a catch. The 5 percent doesn’t apply to all purchases. In fact, for most of these cards, the top cash back rewards apply to only a select few categories that rotate throughout the year. And even in these categories, there is a limit to how much cash back you can earn.

Credit card rewards are so popular because you are actually getting rewarded for spending. These cards offer a promise of free flights, free hotel stays, vouchers, movie tickets, free fuel and a multitude of benefits. A savvy shopper could put these cards to best use. But any average person with little time for planning their expenditure would get lost in the myriad T&Cs and end up spending more due to the rate of interest which would offset any rewards accrued from the card.

- Multiple fees

In addition to charging interest on your usage, credit card issuers may slap you with the following charges/fees, depending on how you use your card:

• Annual fee
• Late payment fee
• Over limit charge
• Card replacement fee for blocked or lost card
• Overseas ATM usage charge
  
  

- The ghost account

This often happens when you close a credit card account without looking at the final statement. The small balance left behind – often a dab of interest or occasionally a fee for making your final payment by phone – can grow to a monster in no time once the domino effect of late fees and the default interest rate get rolling. The most common ghost in a closed account is the residual interest; that is, an interest that was generated between the time the bill was issued and your payment was received. It can be impossible to notice, but it will haunt you if you ignore it.

All the same, these traps shouldn’t put you off getting a credit card. Instead, they should make you think about how to use a credit card responsibly. Before committing to a card, compare what’s on the market to ensure you’re receiving the competitive card that will suit your lifestyle and spending habits.

TRICKS

- Maximizing your statement cycle

Those who pay their balances in full and on time are perpetually receiving a free loan from their banks. This is the smartest way to use your credit cards, but you can even take this to the next level. Any charge made the day before your statement closes will be due 20-25 days later. But if you make that same charge the day after your statement closes, then you have another extra 30 days to pay it without incurring interest. This means you can get an interest-free period of up to 55 days!

- Set up mobile alerts

If you’re not the type of person who is disciplined enough to regularly check your credit card account, you can automate the fraud detection process. Many large issuers now will let you set up mobile alerts that will alert you if & when:

• you’re approaching your credit limit.
• the card company detects unusual activity, like a spending that doesn’t fit your usual pattern.
• transactions in unusual or unfamiliar locations are done
• your card has been used. You can set this for large purchases, all purchases or anything in between.
• due date approaches.
• over limit expenditure or withdrawal performed.
  
  

- Protect your cash

Paying with a card is typically much safer than paying with cash or a debit card. When you pay with cash or debit, your money is unprotected. If you lose your cash, it is gone. Debit cards draw from your checking account. This means that in case of charges applied by unauthorized parties, you lose the balance until the issue is resolved. On the other hand, credit cards can offer zero liability for unauthorized purchases. The credit card company will work to resolve the issue, and you won't have to wait for a refund or be out of any money.

Credit card shopping portals save you money. Many credit cards have their own shopping portals for their cardholders. As an incentive, credit card companies can offer steep discounts and increase the rewards you can earn if you shop through their website. Where a card may only give you 1 percent cash back if you shop at an online store, you may earn 5 percent cash back when you shop through your card's store.

- Avoid ghost accounts

The best way to avoid residual interest/finance charges is to make sure the balance is paid in full. Also, to protect yourself from future debt claims, be sure to request a letter from your card company confirming that the account has been closed.

Ms. Rose Mary Jishore Abic
Chief Executive Officer
at
Auditors Office Chartered Accountants LLC

Ms. Rose Mary Jishore Abic holds a Bachelor’s Degree in Commerce from Aligarh University, Dubai. She is also a holder of a Master’s Degree in International Business and Finance from the University of Wollongong, Australia. Since 2003, Ms. Rose has worked in family business in the UAE, where she had branches in Dubai and Abu Dhabi. She is experienced in the field of finance and administration. She is responsible for overseeing the strategy of the group
Auditors Office Chartered Accountants LLC.