Managing Credit Cards efficiently

Credit cards are a financial tool that can turn into a double edged sword if they are not used carefully. If you get a credit card and use it wisely, you can gain a better credit rating, maintain a responsible level of debt and save money on interest rates. If you use it carelessly and without knowing what you are doing, you are going to get into debt.

So how can you ensure that you are doing yourself a good service by having a credit card?

When to use your card
Long gone are the days where credit cards are used only to pay for big-ticket items. With all the incentives and reward programmes on offer with credit cards these days, it actually pays you to use your credit card more than any other card.

The trick is to use it in such a way that it does not become a burden to you. Reward programmes linked to credit cards are mostly structured to benefit the cardholder that uses his card every day for all his purchases. This is obviously an incentive; the more you buy the more rewards you get. For instance, when you use your credit card to buy basic items such as groceries, you may earn reward points or instant discounts on the items bought (depending on the credit card used). But should you decide to pay off these purchases over an extended period, you end up still paying for the groceries long after you've consumed it (and at a higher price due to the interest incurred)! It is therefore wise to - when using your card for everyday spending to earn rewards or discounts - only use an amount that you can afford to pay back at the end of the month. A charge card will also be a usefull option when choosing to use your card for your everyday spend.

Some cardholders believe that credit cards should only be used in cases of emergency such as a sick pet needing treatment or fixing a burst geyser. In most cases these "rainy day" cards are then also paid off over an extended period.

If you choose to follow this route just remember that a credit card is ultimately a loan. This loan is required to be repaid in full, plus interests.

In the end, how you use your credit card should largely be dependant on your ability to repay the card.

Payments
Paying a minimum monthly instalment on an outstanding balance is mandatory with a credit card. Most cards offer an interest free period (usually around 55 days), and when you pay the full outstanding balance within this interest free period, you pay no interest on the money you used.

Keeping your spending on your card to a manageable amount will enable you to pay the entire outstanding amount at the end of every month, thereby avoiding any interest accumulating.

Interest on cards vary, but are usually more than the prime interest rate, which means over time you will pay off much more than the amount you initially used. For example, should you use an amount of R3 000 from your credit card, at an interest rate of 25%, and pay it off over 12 months, you will end up paying an amount of R3421.56.

If you can't afford to pay the full amount outstanding on your card, it is advisable that you make a payment higher than the minimum required rate on your card. When you pay your card off at the minimum rate assigned, you may find yourself making repayments for what seems like an eternity as cards which are paid at the minimum rate are extremely slow to pay off. When you make more than a minimum payment, you boost your credit rating and history instead of ruining them.

However you choose to pay off your credit card, NEVER use one credit card to pay off another. Not only do you incur interest and charges on each of the credit cards, but you will soon run out of cards, and your cash flow will simply not cover all the debt incurred, sending you into a downward spiral of debt.

Find a strategy to manage your card and do not deviate from it
When you have familiarised yourself with your credit card and what it can do for you, form a strategy for using your card. Decide what you will use your card for, how much you can spend monthly, and stick to it.

Make a specific date for regular card payments and other costs and plan your monthly budget around that according to what the demands of the card repayments are. Regular payments will boost your credit rating and history and work in your favour in future. It is also wise to set yourself deadlines in terms of paying off what has been spent on the card in total.

Keeping your bills, slips and statements is a good idea, as you can query any mistakes you find.

Having a credit card does not need to be an instant dive into a world of debt and late repayments. Having a positive credit rating is important for any future purchases you want to make that require a very sound financial background such as taking out a mortgage on a house or buying a car. If you spend according to a budget, pay your instalments on time and keep up to date with credit card information you will build a good credit record and avoid problems with debt.

About the Author:
Plastiq affords visitors the opportunity to inform themselves about the different credit options and compare and apply for credit cards.