Credit cards have earned a bad rep as a major cause of debt (Read: Confessions Of A Shopaholic). But is a credit card inherently good or bad? Well, it depends on how you use it.
On one hand, a credit card offers a thrill. With just one swipe, you can get almost anything you want, as long as you stay within your credit limit. It’s like having a magic wand! But get carried away with your spending, and you could end up with an overwhelming credit card bill and anxiety-inducing notices from the bank!
On the other hand, a credit card offers convenience. It’s a cash alternative you can use for online purchases and emergencies. A credit card is also a good way to keep track of your purchases and to avoid carrying a lot of cash.
The bottomline is, a credit card can either make your life easier or more difficult. That’s up to you. The good news is having a healthy relationship with your credit card is as simple as understanding the different credit card fees and how they work. Stay away from debt and live a stress-free life with these practical credit card tips!
3 Bad Credit Card Habits That Are Keeping You Broke (And How To Break Them)
1. Not paying your full credit card balance each month
- Penalty: Finance charge
- What it is: Fee for when you don’t pay off your credit card balance (i.e. only pay the minimum amount). This penalty usually amounts to 3% interest from your monthly balance. The longer you take to pay off your balance, the higher the finance charge.
Here’s an example of how your debt can accumulate based on a 3.5% interest rate per month (Source: imoney.ph)
|Balance||Payment||Remaining amount plus interest|
|P 11,000||P 5,000||P 6,000 x 3.5% = P 6,210|
|P 6,210||P 3,000||P 3,210 x 3.5% = P 3,322.35|
|P 3,322.35||P 3,000||P 322.35 x 3.5% = P 333.63|
The additional charge of P 333.63 on top of the original amount of P 1,000 may sound small, but imagine how big the charges can get after several months. FQMom (FQ: The nth Intelligence book, page 101) knows of a simple cook whose “harmless” credit card purchases ballooned to one million pesos after only paying the minimum balance every month.
FQMom shared, “he went around enjoying the perks of his new found weapon, buying things left and right and just paying the minimum every month . . . He felt he had a magic wand, ‘Just swipe it, and goods and money will flow in!’ This went on and on, and he was ‘current’ in his payment because he was paying the minimum balance every month. Before he knew it, his outstanding balance had already ballooned to one million pesos!” Definitely not the first “one million pesos” you want to make!
Useful principles to avoid finance charges:
- Pay the full amount of your credit card balance each month. In this way, you get to keep your finance charge at 0.
- If you can’t afford to pay for a purchase in full, don’t buy it. FQMom’s advice: Buy luxury only if you can afford to buy at least 10 pieces of it.
2. Not paying your credit card balance on time
- Penalty: Late payment fee
- What it is: A penalty when you don’t settle the minimum payment within the due date. This fee is charged on top of the finance fee (explained above). Penalty fees range from P 300 to P 750 (or 2.25% to 8% of the total balance)
When you pay your credit card bill late, your credit score may drop. (A credit score is a number that evaluates how financially trustworthy you are. This score affects a lender’s decision to offer you a loan when you need to buy a house or a car, or to start a business. Payment history makes up a big portion of your credit score, so late payments can have a significant effect on your score.
So do your future self a favor by always paying your credit card balance on time; you’ll be saving yourself from spending more money on late payment fees, too!
Useful principles to avoid a late payment fee:
- Always, always pay your credit card balance on time.
- Don’t buy an item if you can’t afford to pay for it in full.
- Technology can be your friend! You can find lots of bill reminder apps that will help you make sure to pay your bills on time.
3. Spending more than 30% of your credit limit
- Possible penalty: Fee for going over your credit limit
- What it is: PHP 500 to PHP 1,500 fee for each month that you go over your credit limit
If you think you can spend all you want as long as you stay within your credit limit, you’re setting yourself up for a bad credit score. Your credit utilization—or the amount you spend with your credit card compared to the credit limit—plays a major role in your credit score. To build and maintain a good credit score, you have to keep your monthly credit card spendings below 30% of your credit limit. So if, for example, your credit limit is P 20,000, you should only spend less than P 6,000 per month.
Keeping a low credit card balance shows that you are not spending too much of your income on paying your debts—earning you a high credit score, which will work in your favor when you apply for a loan in the future.
Useful principles to minimize your credit card spendings:
- Keep your monthly credit card spendings under 30% of your credit limit.
- Think of the three-day rule to avoid impulse purchases: Wait three days to decide if you really want to buy an item. If the desire wears off, you’ll save yourself from buying something you don’t really want or need.
- Next time you’re at a sale, remember: That item is 100% off if you don’t buy it!
Not sure if you’re ready to get a credit card? Make the right choice by knowing what to expect when you get a credit card. And when you’ve made the decision, develop good habits to stay out of credit card debt.
Being debt-free is an empowering feeling. It’s also a reflection of high financial intelligence. By being free from debt, you don’t have to be weighed down by worries. Instead, you get to focus on enjoying the present and building your future.