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There’s very little you can’t buy with a credit card these days.

From clothes to jewelry; furnishings to appliances; toys to cosmetics; groceries to computers; and much, much more. And all you have to do is swipe your card.

So how many people worry about how they’ll pay up for all this? The nice (and dangerous!) aspect of credit cards is how easy it is to go overboard with one’s shopping. Payment is something that seems to be in the distant future. And so the bills keep piling up, and so do the interest rates. Before you know it, you’re in debt beyond your wildest imagination. And of course, beyond your repayment capabilities.

Many people paint themselves into a corner because they don’t really understand how credit cards work. And what the consequences can be. Because it’s all so easy, so convenient, to spend what you don’t have. So what if you’re charged interest? And so the cycle of outstanding debts continues…

The impact credit cards can have on your life can be of two extremes. They can either destroy you, or they can make your life so much simpler if you use them wisely and sensibly. So it may well be to your advantage to try and learn as much as possible about credit cards, before you swipe your card.

NerdWallet, an online resource for financial advice, and the National Foundation for Credit Counseling stated in a financial literacy survey they had carried out “…roughly 2 in 5 American adults give themselves a grade of C, D or F on their knowledge of personal finance”.

This is so true. Many Americans are quite ignorant about the consequences of improper credit card use, the results of delayed payments and the long term impact on their credit score. People usually only consider the short term benefits of owning a credit card – being able to pay for whatever they desire with money they don’t really have. After all, they can clear the payment at a future date. Little do they know, there’s so much more to a credit card than meets the eye. For instance…

To put it simply, a credit card allows the cardholder to purchase services and goods, based on the assumption that they will be paid for, within a fixed time limit. The issuer of the card sets up a revolving account and establishes a credit limit for the card holder who can “borrow” against that limit for payment to be made to the merchant whose services or goods are purchased, or can withdraw a cash advance. So basically, a credit card allows you to maintain a continuous balance of debt, while imposing a high interest rate on you. Much to your surprise, you will soon have high interest payments to make and will be trapped in debt.

How can you make the most of your credit card?

NerdWallet claims, responsible use of your credit card will make it work to your advantage. And the way to ensure this is to adhere to certain basic guidelines that will result in your financial wellbeing.

  • Make it a point to pay on time. If you are unable to clear the whole payment promptly (and save on interest), you should at least make your minimum payment within the stipulated time frame. Be conscientious about timely utility bill payments and instalments for car loans, because delayed payments may lead to these being sold to loan agencies. Also, your credit score will be negatively impacted, and you will have to pay late payment charges and penalties. Setting up automatic payments from your bank account every month will help.
  • Normally, making minimum payments should be enough to ensure your payment history isn’t adversely affected, but do try to clear your full balance whenever you can. This will establish your credit use as being reasonable, along with your interest rates. As per financial experts, ensure credit utilization — which is the percentage of your debt balance in relation to your credit limit — remains under 10%.
  • Also ensure a healthy credit history by maintaining active credit card accounts over a long period of time. If you keep your credit card accounts open and up to date on payments they won’t be shut down due to dormancy.
  • Always collect the rewards on your credit cards regularly, by redeeming miles and getting cash back on purchases.
  • Try to benefit from your credit cards by using price protection; extended warranty protection; rental car insurance; free FICO score; and trip cancellation coverage.

A wide variety of credit cards are available to cater to various requirements. Learn to prioritize your needs to choose the best cards that meet your financial objectives. Different cards offer different benefits depending on the end use so study them well to see which ones are to your advantage.

The two basic types of credit cards are:

  • Secured: These require you to pay a deposit that matches the limit on your card before you can use the card. The deposit is a security or collateral against unforeseen circumstances, like when you can’t repay the amount used on your card.
  • Unsecured: These are used more than secured cards because they do not require an initial deposit. So you will be issued a card based on your credit history that will assume that you will repay the sum according to the terms and conditions of the card member agreement.

You can choose from a variety of credit cards such as:

First Time Credit card

These are suitable for someone who has never owned a credit card before, such as students who would like to apply for a credit card for the first time, to build their credit history.

Cash Back Rewards cards

You will receive points each time you make a purchase, such as paying for your monthly utility bills or your groceries. The number of points you earn will be calculated on your purchases and the shop you buy from. With this card, you can redeem your points for:

  • A statement of credit
  • A deposit in your checking/savings account
  • A Rewards Visa card
  • Car rentals

Retail Rewards Credit cards

You will find a wide range of retail credit cards that suit your shopping needs. They cover many types of purchases including groceries, clothing, sporting goods, gas, etc. Look into store credit cards that provide excellent rewards depending on your shopping pattern.

Travel Rewards Credit cards

This is the type of card that allows you to earn airline miles/points towards:
  • Flights
  • Seat upgrades
  • Hotels
  • Car rentals
  • The right to use airport amenities like a preferred client lounge.
You will earn rewards with each purchase. These would be perfect for you if you are a frequent traveller on business or on holidays round the year.

With the passage of time, the law has introduced codes of conduct that protect credit card holders from fraud and exploitation by banks/card issuers and finance companies. These include:

  • The right to file a complaint with/against your credit card company.
  • The right to dispute wrongful or inflated charges on your credit card.
  • Protection against unfair practices – this was assured by a Bill of Rights which was established when the Credit Card Act was passed by Congress.

Cardholder’s Bill of Rights

Your protection is assured by the Credit Card Act that forbids abusive and unfair practices, such as:

  • Letting you exceed your limit amount and then charging you an over limit fee
  • Escalating the rate on existing balances

It also mandates that card issuers are accountable to card holders and must provide an explanation of rates and fees charged on the credit cards, so you get clarity on what you pay for your credit card use.

Also, credit cards that are used for travel related purchases often offer travel insurance that covers:

  • Cancellation of trip if you or a family member falls ill.
  • Delays in trip.
  • Luggage lost during travel.
  • Auto insurance for car rental deals
  • But, rules may differ between different cards and issuers.

Dispute of credit card charges

The Fair Credit Billing Act, gives you the right to dispute charges for reasons that include:

  • Imposition of incorrect charges.
  • Charges not incurred by you.
  • Charges for goods/services you did not receive.

Ultimately, the ideal way to protect yourself against any negative effects arising from the use of your credit cards is to make wise and responsible use of them. Do not exceed your credit limit and clear your balance payments on time. Try to never withdraw cash from your credit cards as this will result in very high interest rates. Do everything you can to keep your credit score healthy.