Personal Finance - Credit Cards
Credit card became most popular in today's world. Banks of doing excellent job in offering credit cards to the customers and monitoring them. But form a customer point of view, are we using the credit cards effectively? Lets read this entire article completely to know more details.
The most popular credit cards companies are Visa, Master, Amex, Discover, Diners club. Credit card offering to customers are based on their job and income. Banks in USA depends on credit score for their US customer. Still there are many countries have not have implemented the credit score monitoring system.
Bank of America, Citi Bank, Wells Fargo, Chase Bank and other banks are so competitive in offering credit cards to their customer. Usually the customers will get a lower interest rate when they have a very good credit score.
The credit line will also vary from person based on their household income. Credit cards provide easy access and convenience for spending and also provides emergency cash access when the people are in financial distress.
- Paying the statement balance before 2-3 days of due date. If you pay less than statement balance, you will have to pay interest changes for your purchases. The interest rate may vary on case to case. But usually on a promotional period for 6 months to 1 year, you will get zero percentage. After promotional period, it will be higher, some cases, it may be more than 24%. If you pay less than statement balance every month, only banks can make money out of you.
- Planning bigger purchases - You will grace period for at least 20 days for your purchases to avoid any fee as long as you pay statement balance in full every month. So if you are planning for a big purchase, like buying a car by using your credit card as down payment, make the purchase after your credit card statement closing date. so that you will get at the maximum grace period of 50 days. If your car down payment is 3000 USD, then it is nice to have it interest free for the maximum duration of 50 days. If you make the purchase towards end of your statement period, then you will get only 20 days grace period.
- Proceed with reward cards - There are many credit cards comes with rewards. At least we should have one point for one dollar spent. Once we reach 10,000 points, then we can get cash back or retail reward cards or any other rewards like free air tickets. Having credit cards with no rewards is not a good idea.
- Better to have 2 or 3 credit cards / lines - so that it will improve your credit history. If you have multiple cards, try not to use only one card to the maximum extent. In this case, credit to debit ratio on one card will get higher and that is not a good idea as it will lower your credit score.
As a brief, are you getting balance transfer checks in the mail to use them? Then you are on the right track and using your credit card effectively. Banks issuing credit cards will monitor your usage and they may keep rising your credit line based on the payment history and your income and other criteria banks might have.
- Late payment - This is one factor which will result in late payment fee as well as it reset all the promotional offer you are having with the credit card. In case, if you have a 0% APR credit card, you are late in one payment, then the interest rate would rise significantly.
- Reapplying credit card when you get rejected once - This is a not good decision and it will again lower your score. Once you get rejected from one bank, it is very difficult to a new credit card from another bank.
- Doing balance transfer while applying a new credit card - This is because you do not know what your credit line would be. You may do a balance transfer for 5000 USD when you may get approved for just 3000 USD. So that you have crossed over your limits. In this case, you may have to pay high APR along with over the limit fee.
- Doing a balance transfer when there is a transaction fee - The transaction fee is significant you may have to pay about 3-4%. If you do a balance transfer for 10,000 USD, you may have to pay around 300-400 USD up front
- Doing a balance transfer when there is a high APR - If you get a low APR or 0% APR, it is OK otherwise it is not a good idea.
- Doing a balance transfer - It is not bad idea however it gives an gateway entry point to all financial problems. Banks might even offer 0% APR for 6 month or one year with no transaction for the people with excellent credit history. Many people might think that it is a compelling situation to use the entire credit line for 0% APR with no transaction fee. If you could pay back with in the given promotional period, you are OK. But whatever so reason, If you are not able to pay back and paid only minimum payment, you may have to face deep financial distress. Because,
- As you have used your entire credit line on credit card, you will not get approved for any new credit cards. So there is no option to rotate the money from one card to another.
- Credit card companies may charge 15 - 25% for your remaining balance. That will put a right break on your repayment. As your most of the payment would get into interest rather than principal payment.
- One you are at this stage, even if you pay down with good percentage, credit card companies may lower your credit line to protect them and put you in deep trouble as it will hit you back with high debit ratio.
Posted on June 05, 2010