Tuesday, February 9, 2010

5 Ways to Get the Most Out of Your Credit Card

Credit cards are the most convenient source of financing available to almost everyone. With credit cards, you won’t need to carry a lot of cash for both planned and unanticipated purchases. And as Internet commerce continues to flourish, credit cards have also become essential to people who frequently buy and sell stuff online.

Unfortunately, this convenience may come at a very steep price: apart from the annual membership fee which ranges from 1,000 to 1,600 pesos, credit card debt also comes with very high (effective) interest rates, oftentimes as high as 51% per year! That means if you buy something worth 10,000 pesos today using your credit card, your debt may balloon up to 15,000 pesos in one year; that is, if you don’t play your cards right.

There are many ways of maximizing the benefits of credit card use and avoiding repressively high financial charges. Here are a few tips that will ensure that you get the most out of your credit card (and not the other way around).

1. Take advantage of the free stuff.

Do you know that you don't have pay the annual fee even once? Just call your credit card company and ask that your annual fee be waived; you'll be surprised how accommodating they can be to your request. Mine came with a condition, though: they requested that I sign up for SMS alerts that don't cost anything. Who was I to refuse?

Don't forget that you earn points for your purchases, points that can be converted to air travel miles, gadgets, food, and other freebies. Don't even complain if you just earn a 500 pesos Jollibee GC after a year of using your credit card: 500 pesos is infinitely better than nothing.

2. Get a free ride.

Most personal finance blogs or guides would advise you to always use cash whenever you can and avoid using your credit card to avoid financial charges. But remember, you’ll only have to pay interest on your credit card if you don’t fully pay your Total Amount Due before each monthly Payment Due Date. Paying off your credit card bills completely each month (not just the Minimum Amount Due) has the same effect as getting a short-term loan at zero percent interest; you’ll never find a sweeter deal anywhere else! By doing this, you avoid thousands of pesos in interest payments and accumulate very high savings in the long run.

3. Avoid being in debt (virtually) forever.

If you only pay the Minimum Amount Due, which is around 5% of the total amount, month after month, you’ll soon find yourself in a very deep financial hole that is almost impossible to get out of. For example, if you owe a credit card company 20,000 pesos and you only pay the minimum amount (let’s assume 5% of the total) every month, it will take you more than 16 years to bring down the debt balance to under 1,000 pesos and you will have paid a total of more than 40,000 pesos in interest charges! This happens because credit card payments go to interest first; by paying only the minimum amount, all your payments go to interest charges, leaving the principal almost untouched.

4. Pay more than the minimum.

If getting a totally “free ride” and paying the entire credit card balance every month is unrealistic for you, then just increase your monthly payment to a level that is significantly above the Minimum Amount Due and bite significant chunks off the principal every month. Taking another look at the above example, if you pay Php 1,200 religiously every month, it will now only take you a little over two years to completely pay off your 20,000 peso debt ; compare that to the 16-plus years it will take you if you only pay the minimum amount!

5. Don’t bite off more than you can chew.

The only reason why you’ll find it hard to pay off the entire Total Amount Due of your credit card bill is if you continuously spend more than what you earn. Because credit cards give the illusion of enhanced spending power, it is important to know what your true spending limit is and try your best to avoid going beyond this amount.

In the end, it all just boils down to using your credit cards sensibly and responsibly. By following the above tips, you can avoid being a slave to credit card companies and make your credit card work for you instead.

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