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How To Use Credit Effectively Without Overborrowing
Do you have a credit card? Or are you planning to get one soon? If so, you've come to the right place. Having one or more credit cards is pretty normal. For business purposes or personal needs, such as travelling, credit cards offer convenience, security, and a myriad of benefits that can range from cashback rewards to travel perks.However, with great power comes great responsibility. We don't know what will happen in the future. You might lose your job and face financial difficulties, making it impossible to pay off the debt you've accumulated on your credit card. Knowing how to maximise your credit card benefits without falling into debt is a life skill nowadays, because once you've fallen into debt, it can be very difficult to get out of it.Understanding the benefitsCredit cards offer a convenient way to make purchases as it allows you to buy something without having to go to the ATM to withdraw cash. You won’t have to carry wads of cash around (which can be a safety concern) or fumble with change at the cash register.Plus, for larger purchases, you can split your payments into instalments that can help you manage your monthly expenses better.Credit cards also come with a host of perks and rewards that users can take advantage of, including cashback, travel rewards like miles points, discounts and promotions. These can also add to your savings.Additionally, when used responsibly, credit cards can help build your credit score, which is crucial if you want to take a loan in the future. A higher credit score improves your chances of getting approved for a loan and can even lead to better loan terms such as lower interest rates. But to reap these benefits, you’ll have to manage your credit card responsibly by making your payments in full and on time.Understanding the dangersYou need to be careful of credit card traps. Credit card interest is typically around 2% to 3% per month, and this is cumulative, so debt and interest roll over when you don't pay it off. Meaning your interest can earn interest and you may find yourself facing growing credit card bills that can quickly become difficult to handle.You should also be cautious if you use your credit card to withdraw money from an ATM. Known as a cash advance, this quick money may help you in an emergency but comes with very high charges – high fees and interest rates. Plus, interest is calculated daily!Using credit responsibly To avoid falling into the debt trap while maximising your credit card benefits, adopting a disciplined approach is key. Here are some essential strategies to consider:Prioritise needs over wantsRemember when we talked about differentiating between needs and wants? Unfulfilled needs impact your survival, while unfulfilled wants only really affect your dopamine. For example, imagine you're on vacation in another country and you see the branded sunglasses that you've been dreaming of. Instead of immediately buying them on your credit card, think about whether the item falls into the category of a need or a want, then consider if it fits into your budget. Conscious spending, thinking carefully before making a purchase, leads to happier purchases and less buyer’s remorse.Don't spend to the limitEvery credit card has a spending limit, but that doesn’t mean you should use it all. Maxing out your limit every month puts you at risk of not being able to pay your bills in full, leading to uncontrollable debt. How much credit you use, known as credit utilisation rate, also affects your credit score. So, try limiting your credit usage to about 30% (or less) of your credit limit.Pay your balance in full and on timePay your balance in full and on time, every time, to avoid any interest at all. Late payment of credit card bills can result in late payment fees and potentially damage your credit score. A low credit score can affect your ability to obtain loans in the future.Credit cards can provide many conveniences. But behind these conveniences, credit cards can be a danger to your financial health. They can result in debt and damage your credit score if you are unable to pay the bills. Therefore, make sure you are in control of your credit card and not the other way around.This content is part of the Temasek – Financial Times Challenge, a financial literacy education series in Singapore for youths.
