As said in Spiderman – “With Great Power Comes Great Responsibility”. This quote is perfect in describing a credit card which provides great buying power, but this power must be used responsibly. For first time card holder especially, individuals new to the work force, will be excited to have that capability to use their credit card month on month to buy all the things they have always dreamed about. If they are not careful this great power they wield could hit back hard.
This article talks about rules to be followed by the people getting their first credit card to make sure they don’t get into trouble by not using the credit card responsibly.
Tips on wielding your credit card
1. Maintain strict budget
Power: Once you get your credit card the credit limit assigned to you is available any time of the day. All you need to do is swipe your card and you can buy the things you want.
Responsibility: This easily available credit is one of the biggest reason for overspending. Over spending and falling into a situation where you cannot repay your credit card bill will affect your credit score. Also, over utilizing your credit limit i.e. using more than 30% of your credit will also affect your credit score as the credit utilization ratio is also part of it. Therefore, first-time credit card users need to stick to a strict budget and sign up for instant message alerts giving continuous updates on your credit card usage.
2. Do not increase credit limit
Power: Whenever you apply for a credit card you will have a credit limit based on your repayment capability. In due course the card issuer might assess your credit usage, repayment history and salary increase to tempt you by offering an increase to your credit limit.
Responsibility: As your buying capability increases, irresponsible spending could also land you in debt. It is best if you do not ask for an increase your credit limit for the first year until you get a hang of managing your credit card. If you do decide to increase your credit limit it must coincide with increase in your salary.
3. Always repay your dues on time and in full
Power: The card issuers provide a certain amount of time usually 30 to 50 days with in which the card holder needs to pay the credit card bill. Also, all card issuers provide a facility called minimum balance due which the card holder can pay for that month credit card bill. The remaining amount due will be carry forwarded to the next month.
Responsibility: Though you have a credit repayment period it is best to pay off the credit card bill as early as possible and in full. This is because there are chances one might forget to repay the bill, or an emergency could arise making it impossible to pay your bills. Missing payments will affect your credit score. Also, a minimum balance due is a useful facility in times of emergency one should not make a habit out of it. This is because the next month you will be paying the balance with interest along with the dues for that month. The chances of you landing in debt is very high. Therefore, you must always pay your credit card bill in full each month.
4. Use cash advance only as a last option
Power: Card issuers provide cash advance with a certain limit which can be used by the card holder. This cash is also another type of credit separate from the credit card limit.
Responsibility: You must use the cash advance feature on your credit card only as a last resort. This is because the cash advance has high interest rates starting from 30% per annum. This interest is computed as soon as the cash is withdrawn and continue to get compounded till every penny borrowed is repaid. It is best to use your debit card when withdrawing cash as it is your own money and you don’t have to pay any interest. Make sure you use cash advance carefully and in a situation of highest importance and urgency.
5. Keep your card secure
Power: Credit cards especially credit cards tailor made for usage online, provide great benefits when the card holder uses it to do any financial transaction. You can also hand over your card to your family members which they can use to buy or pay any bills.
Responsibility: If you already have a debit card you might know this – Never share your PIN and CVV number with anyone. The CVV number is the one printed on the back of the card. If you hand it to your family member, make sure you change the pin before you use it again. You need to take care when giving the card to a vendor making sure that no skimming happens. Also, when paying online make sure you are on a secured and authorized website. Make sure that multi factor verification occurs as followed by both MasterCard & Visa. This multifactor could be an OTP number or your PIN number that must be verified.
The credit card is a great tool easing financial transactions for the card holder while providing a higher buying capacity. Though it has its uses it still needs to be used responsibly, otherwise a person especially first-time user can land into pitfalls. These pitfalls can be avoided with responsible usage and proper information.
As mentioned earlier - “With Great Power Comes Great Responsibility”