How to use credit cards


    Ever since their inception in the 1950s, credit cards have revolutionized the financial industry, becoming one of the most preferred modes of payment worldwide. Offering convenience and other attractive benefits, credit cards have easily found their way into the wallets and purses of many Singaporeans.

    Most major banks like HSBC, Citi Singapore, DBS, OCBC, and Standard Chartered offer credit cards these days. The process of getting a card has also become simpler than before. Fill out a form online or offline and if you meet the bank’s criteria, you will be given a card along with instructions on how much you can borrow, often known as the credit limit.

    However, not everyone knows how best to manage a credit card to their advantage. Few are even aware that despite the enticing features that their cards offer, there are various pitfalls that should be avoided.

    The first thing to understand is that the use of a credit card is a kind of borrowing. But unlike loans which are often provided in large sums for long periods, credit card helps you borrow small amounts for short periods like a month.

    The money you borrow in such a manner is presented to you as a credit card bill at the end of the specified period. If you fail to pay this bill promptly, you may have to face various finance charges that get worse with time.

    Using a Credit Card

    Essentially, there are two ways to use your credit card, offline and online. When making a purchase at a retail outlet, you can use your card to pay if the merchant accepts the brand of card you own. The brand, here, refers to companies like MasterCard and Visa. They are generally known as card associations or card networks.

    Once a payment is made, you and the store receive a receipt. The store-owner will present his copy of the receipt to the bank to claim the amount. The bank, on its part, will pay the store after taking a fee.

    Most credit cards can now be used for online transactions as well. While this is may seem like an extremely convenient system, be aware of potential cybersecurity issues. Ensure that the website you use your credit card to make payments is trusted and uses secure protocols like HTTPS. When you receive your credit card bill, give it a careful read to be certain you are only being charged for valid transactions.

    Tips to Manage Your Credit Card Effectively

    If you are clear about how to use a credit card, the next step is to know how to effectively manage it to avoid running into a financial disaster. There are several points to keep in mind. Some minor details may differ from one card and card issuer to another but for the most part, the fundamental rules remain the same.

    1. Do Not Spend More Than You Can Afford
    2. This might appear as an obvious rule to follow, but unfortunately, it is often one of the most ignored. Many credit card holders, especially those owning a card for the first time in their lives, get over-excited at the amount of money they are allowed to spend. Such an attitude often runs up bills that they can never afford to pay and land them with debts of thousands of dollars.

      The best practice is to use a credit card to spend only as much as you can pay in cash at the moment because you can never be fully certain of the future, even if it is relatively near. What if you get laid off or face some sort of emergency? The old adage ‘spend within your means’ applies to the use of credit cards as well.

    3. Understand Your Bills
    4. Credit card bills are generated mostly at the end of every month. Apart from how much you are liable to pay, there are two important things you need to watch out for in this bill. One is the date on which the statement has been generated and the other is the date before which you are supposed to pay the bill.

      The payment date and any relevant grace period offered will vary from one card to another. If you have more than one card to manage, being aware of such details is extremely important.

    5. Ensure Prompt Payment of the Bills
    6. This is perhaps the most important step to effectively manage your credit cards. Failing to pay credit card bills on time can lead to a number of problems, including late fees, interest, and bad credit scores.

      The later you pay the bill, the higher the interest will be. Similar rules could apply to late fees too. You may not have to fret too much about your credit score if you missed the due date once by a day or so. But you should be concerned if you are consistently unable to pay your credit card bills on time.

      Many people, especially those who own multiple cards, end up forgetting to pay their bill on time. To avoid this problem, you can rely on automated payment systems that many banks now offer. If you would rather manually pay the bills yourself, you can set reminders on your phone or computer to make the whole process easier.

    7. Ensure Full Payment of the Bills
    8. Some credit card owners consider the option of paying part of their bill and carrying the rest over to the next month. This can be a dangerous practice as an unpaid balance accumulated over a period of time can attract steep interest rates.

      The interest rates are usually calculated based on your average daily balance. Unfortunately, many people do not understand the concept of a credit card’s average daily balance and are under the impression that interests depend on the amount that is left after payment. However, nothing could be further from the truth. Card issuers mostly consider the average daily balance and calculate interest rates based on that.

      Not paying your credit card bills in full can lead to other complications as well. For instance, any transactions made to the card after being penalised could start amassing interests straightaway. In short, if you keep pushing part of your payable amount to the subsequent months, you will end up with massive debts that could haunt you for years.

    9. Keep a Close Watch on the Monthly Statements
    10. A monthly statement will provide you details of the transactions you have made during the month. Make sure you go through this each month to ensure you are not a victim of any fraudulent activities. Although your card issuer is likely to have a solid security strategy in place, malicious hackers are constantly coming up with new exploits that can go undetected.

      Paying close attention to your monthly statements will also help you keep your spending in check. One of the problems with cashless transactions is that you tend to lose track of how much you are actually spending and how much money you can afford to spend. Regular checks on your monthly statements can help you keep track of this and avoid falling into the risky habit of overspending.

    11. Maintain Low Balance
    12. Keeping your balance or credit utilisation at relatively low levels can help you maintain a good credit utilisation ratio, which is calculated based on the how much you have spent and how much you are allowed to spend. This calculation is expressed in percentage, as the amount of credit that is not used up on a credit card. A good credit utilisation ratio is essential for a good credit score.

      For instance, if you spend half of the amount available to you, your credit utilisation ratio is 50%. To maintain a good credit score try to make sure this ratio does not go over 30%. Low balance levels can also prove useful in ensuring you are not overspending on your card.

    13. Using Your Credit Card Abroad
    14. If you are planning to use your credit card overseas, there are certain points you might want to consider. This starts with choosing a card that is suited for use in a foreign country. Credit card issuers often charge a fee for transactions made abroad. While this may be unavoidable, you must carefully read the terms and conditions that accompany your card to know if there are any other charges applicable.

      You must inform the card issuer of your trip before leaving the country. This is because an unexpected use of the card abroad could prompt the issuer to suspect fraudulent activity and block transactions. Make sure you activate the magnetic stripe on your card just in case you come across payment facilities where chip-based cards are not usable.

    How to Improve Credit Score with Your Credit Card

    Credit scores are integral to deciding your credit-worthiness. When you apply for products such as loans, lenders consider your credit score to decide if you are reliable enough to repay the amount.

    Credit cards, when used wisely, are an excellent tool to improve your credit score. If you are able to manage your credit card following the steps that are outlined above, your chances of a good credit score are high. But to increase it even further, you will need to understand how the score itself is calculated.

    There are five key elements that come into play when your credit score is calculated. These include credit utilisation ratio, payments in the past, how long you have used credit, how often you apply for new credit, and the different kinds of credit you use.

    1. Credit Utilisation Ratio: As explained earlier in this article, credit utilisation ratio refers to the percentage of the amount you are allowed to spend but haven’t. A low credit utilisation ratio could get you higher credit score.
    2. Payments Made in the Past: If you have a history of paying back loans and credit card bills on time, you will be considered a reliable person to lend money to. The more reliable you are, the higher your credit score.
    3. How Long You Have Used Credit: If you have been using credit for a long period, good on you. A long history of credit use is considered advantageous to getting a high credit score.
    4. New Credit Application Frequency: Credit score calculators frown upon the habit of applying for credit products too often. Ensure a reasonable interval between your applications for better results.
    5. Holding Different Kinds of Credit: For a better credit score, refrain from sticking to just one kind of credit and opt for a diverse portfolio.

    Low credit utilisation ratio and prompt, full payment of credit card bills will go a long way in helping you build a good credit score. You can further improve credit utilisation ratio by convincing your card issuer to raise your credit limit while keeping the spending low.

    Keeping your first credit card active is also considered a good strategy as it will help you have a long history of credit. Your record of payments can be further bettered by setting up automated, recurring payment systems on a credit card.

    How to Make the Most of Your Credit Card Benefits

    One of the most attractive features of a credit card is the number of benefits that card issuers provide in the form of rewards, cashback, air miles, etc. Different cards offer different kinds of benefits in this regard and it is essential that you choose a card that would match your spending habits.

    Cashback, Rewards, or Air Miles?

    Credit card applicants are often not sure whether to go for a card that provides cashback, rewards like points, or miles. The best solution to this situation is to have a clear understanding of your habits and activities.

    If you are a frequent traveller, for instance, a card that provides air miles may be a good idea. If you are an avid shopper, rewards associated with spending money in stores could be worth considering. A cashback card could be considered a safer option for an average customer whose spending does not particularly lean towards any specific area.

    You may also consider owning two cards to get maximum benefits. For example, if you are into travelling and shopping, a separate card for each could serve you better.

    How to Use Reward Points?

    Most banks offer quite a few ways to redeem your reward points. Rewards points can be converted into any of the following:

    • Air miles (if you have enrolled in the bank’s frequent flyer programme
    • Vouchers for selected merchants
    • Instant redemption for rebates at partnered stores
    • Cash value, to offset your monthly bill

    Most banks will have a dedicated webpage on rewards and redemption. You need to decide what redemption gives you the best value for money before you actually effect the conversion. In Singapore, air miles generally give you the best value for money, and cash values might be the worst choice to make.

    To sum up, a credit card can be an effective financial tool if used well. Apart from the convenience of cashless transactions, they help you improve your credit score while offering rewards in the form of points, cashback, miles, etc. However, credit cards can also be a pain in the neck if not used wisely. Uncontrolled spending and failure to pay bills on time could land you in deep financial trouble.

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