Using your credit card responsibly


July 10, 2011

It’s key that credit card users understand that when they use their card they are actually receiving a loan from their issuing bank Chances are that like most people in Oman, you have more than one credit card and have been using it to get many things you ‘want’ rather than what you ‘need’.

In today’s environment we need to start being more responsible and aware of our debt. Banks are prudent in their lending strategies thereby making it more difficult for you to get a loan to buy a house or car if you already have too much debt. This is to ensure you do not end up in a debt-trap.

Firstly I think it’s key that credit card users understand that when they use their card they are actually receiving a loan from their issuing bank. The bank charges interest on this loan. However, as a responsible and educated user you can use this loan to your advantage to make purchases without paying any interest.

How do you do this - most banks typically have a 20 to 30-day period before they levy the interest on your purchases. This is called the interest-free period.

This is your opportunity to defer payment on your credit card without incurring any interest. Many credit card users do not pay their credit card balance in full each month, turning their credit card into a revolving credit line. While this is acceptable for short-term financing needs, one should not use the credit card for extended borrowing needs, thereby facing accumulated finance charges and getting deeper in to debt.

It is vital for credit card users to keep a track of their credit card balance and to ensure their payments are made on time. Setting up standing instructions with your bank for the minimum amount or the amount you want to pay will avoid any penalty fees. This is also convenient as you do not have to keep track of the payment due date on your card if you are travelling. However, it is important to note that as the balance on your card rises your minimum monthly payment will also go up, so you need to include this in your monthly expense budget.

You should also be aware that making only the minimum payment each month increases the amount of time it will take to pay off your debt. It also increases the amount of interest you end up paying. To pay your debts off quicker and cheaper, you should pay as much as you can on your balance each month. It is also good practice to pay down your card outstanding every once in a while, say once in four to six months.

Every credit card has an available credit limit which is the extent to which you can use your card. Another good way of managing your credit card debt is to stay within affordable levels of your credit limit. You are the best judge of your financial position and should exercise prudence in using the available credit limits on your card. This will help keep your balances low and thus be easier to manage. You should also evaluate the interest rate on your credit card periodically to be sure you are getting the best deal possible.

Using your credit card to get a cash advance is something you should avoid if you want to keep your expenses down. There is usually a high charge on this withdrawal and interest is more than what you would normally pay on a loan or overdraft.

When facing credit card debt that can't readily be paid, the best plan of action is to act early, speak to your bank, reach some sort of payment arrangement and make a resolution to stick to a repayment plan. The worst thing you can do is simply forego your credit card payment, no matter what the reason.

Large banks have specialised departments which help customers who find themselves in these difficult circumstances. They will have a wide range of solutions to help people with the emphasis on finding a resolution, which best suits their budget and affordability. These are readily available and can be implemented without delay, in order to avoid additional fees or distress.

Sometimes customers get into problems because they are transitioning between jobs. I encourage them to contact and work with their banks and remove any anxiety that they may have. Experience has shown me that early contact gives the bank a much better opportunity to help the customer.

While there are many issues that you, as a consumer and credit card holder, must be diligent about, for those who use credit cards properly, they offer a number of extremely important advantages.

Credit cards are definitely safer than carrying large sums of cash and vital when traveling. This convenience and added security is key for responsible card users. You can also profit from getting free insurance, discounts and special offers when you use your card.

You must review your card benefits carefully and make the most of them in order to truly benefit. Another often forgotten benefit of cards, unlike when you spend cash, is your ability to have a snapshot view of your spending over the month through your card statement. This will help you budget better and cut out unwanted spending in the future.

Rewards programmes or money back schemes are also an added advantage. Most cards in the market provide these rewards. So if you use your card wisely and pay off your card balances in full each month, credit cards are a boon and a truly rewarding financial product.

Said al Adhali is head of personal financial services support and operations at HSBC Oman. If you have any queries on this subject or another topic related to his area of expertise, e-mail muscatdaily@apexmedia.co.om