Owning a credit card is a responsibility that needs careful execution and usage. While it is a useful financial tool that can make life easier, incorrect or reckless usage can be your first step towards a long-term financial crisis.
Follow these smart credit card usage tips to ensure that you are using your card optimally and avoiding these credit card mistakes
Mistake #1: Not knowing your credit card billing cycle
Your credit card comes with an interest-free period, which means if you repay the funds within the stipulated time period, you will not be charged any interest. The interest-free period is not linked to the day of purchase but to the credit card billing cycle.
For example, if your card’s billing period starts on the 10th of every month, any purchase you make on the 9th of that month will get only an interest-free period until your bill is due.
Tip: Time your credit card purchases in accordance with your billing cycle so that you can get the maximum benefit of your card’s interest-free period.
Mistake #2: Paying only the minimum due amount each month
If you are paying only the minimum amount due every month, you are carrying a balance to the next month. The minimum payments done from the second month onward will go largely towards servicing the interest component of your outstanding amount.
The interest will be calculated as per the interest of your card. On an average, it is around 2.16% per month or 26% per annum. This means the principal amount remains as outstanding and this increases your overall cost of ownership.
Tip: While it may not be always possible to avoid carrying over a balance, aim to pay it off as soon as possible, or even consider taking a personal loan to repay your credit card debt. Personal loan interest rates are lower.
Mistake #3: Using your credit card overseas
Using your credit card when travelling overseas may sound convenient, but it attracts a foreign currency transaction fee which is around 2.5-3.2% of the transaction amount. This adds to the final cost of your purchase. When travelling, it is better to use cash, or a debit card linked to a multi-currency account, to ensure that you are not paying additional fees for your overseas purchases.
Tip: If you really have to use your credit card overseas, use cards that offer rewards on overseas spends – for example, the Citi Cash Back Card or DBS Altitude Visa Signature Credit Card are good options for travel spending. These cards offer cashback or miles on overseas spending.
Mistake #4: Opting for cash withdrawals from your credit card
Many credit card users opt for cash withdrawals and are unaware of the high-interest rate and fees on such transactions. Any cash withdrawal made on your credit card is considered to be equivalent to an unsecured loan and carries interest rates as high as 26% per annum. Cash withdrawal sometimes comes with a withdrawal fee of as high as S$15 or 6% of the withdrawn amount.
Tip: With more and more digital wallets and e-payment methods becoming available, there’s really no need to be paying with cash, especially if the alternative is to take a cash advance using your credit card. If you’re travelling abroad, it’s far better to pay with your credit card than to withdraw cash from the local ATM.
Mistake #5: Not keeping track of your rewards points
Some of us have multiple credit cards that earn us reward points as we spend. Many of us also have the habit of saving those points so that we can cash out a ‘big prize’ at the end. But what often happens is that we forget to keep track of our points expiry, and one day it expires without us knowing, totally defeating the purpose of accumulating those points in the first place!
Tip: If this sounds like you, get a cashback credit card instead, or a credit card whose points never expire. An example of that would be the DBS Altitude Visa Signature Credit Card or Citi PremierMiles Visa Card.
Mistake #6: Shopping for reward points and not your needs
Credit card rewards may sometimes be too lucrative to ignore. Ensure you are using your credit card to make purchases that you need; do not let the reward points be the sole reason for using your card.
Tip: Opt for specialized shopping credit cards like the Citi Rewards Card or the OCBC Titanium Rewards Card for 10x points on your shopping spends. There is no minimum spend to earn points so that will help you not to overspend.
Do you know of other credit card mistakes we shouldn’t make? Let us know!