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Credit cards: Handle with care

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Need money urgently but can’t arrange the funds through a bank loan? Or friends not able to help out?

Well, simple, reach out to the colorful card in your wallet called the credit card. Problem solved.

Yes, most times, the credit card could be our savior in difficult times. Hospital emergencies, that unpaid rent or school fees or temporarily out of a job and credit card could come to the rescue.  

The often repeated cliché: Free credit when you need it. True. Till the time you need to pay it back – the due date. If you don’t have the funds at this point, this is when you realise that it is similar to borrowing funds from a money lender if you can’t make the payments on time:

  • A late payment fee if you don’t pay by the due date. (Your wallet will be lighter by minimal of Aed 250 or more, depending on the credit card);
  • An interest rate ranging from 3.25% onwards: Annualized, that is a STAGGERING 39% per annum (not mentioning interest on interest if unpaid!!) !! It is thus the costliest form of borrowing and should be used only if you have no other choice and should not be as a matter of convenience. (Use your debit card instead!!).

Here is how the interest applies:

  • If you don’t pay the total balance due in full on the due date, then you have to start paying interest from that day;
  • Every transaction that you do from this date on the credit card will be charged at the notified monthly rate (every day it is outstanding, you will be charged!!);
  • And it is not simple interest, it is compounded, so you will end up paying interest on interest if you do not settle!!

Here are some ways in which you can try and keep the interest payments at a minimum:

  • If a personal loan option is available from a bank, avail it straight away and pay off the credit card outstanding, this may be up to 3 times cheaper than your credit card borrowing!
  • Running up a high borrowing on a credit card and another bank is willing to give you a credit card based on a favorable credit rating? Ask them for a balance transferà some of the banks do it at a very nominal rate or when giving you a new card, may even offer a free balance transfer without interest for the first 3 months. Got the offer? Take it, utilize the balance transfer option and reduce your interest load. Remember, it will be definitely than paying 3.25% or higher!! The bank(s) may also offer balance transfer offers subsequently, avail it.
  • Keep paying the minimum balances on the due date. Create a favorable track record and very soon, your bank may come back to you and offer you a cheaper payment plan based on fixed instalments: such as a 12 month or 24 month payment plan at a cheaper interest rate. (Note: paying the minimum amount does not mean that you don’t pay interest—it only means you avoid late payment fees)
  • If you have more than one credit card and you are paying interest on one, use the other for your future transactions. Then you get a 50 to 55 day interest free period on this card. Well, if you are paying interest on all, then make sure you pay at least the minimum amount on the due date, you can then avoid late payment fees and also a bad credit rating;
  • Cash advance on a credit card: Should be the very last resort!! A cash advance means a 3% fee (depending on the card issuer) upfront and then the regular interest rate will apply on such advances from day one! So if you have taken a cash advance against a credit card, pay it off immediately when you have the funds, do not wait for the due date, for each day accrues interest!!
  • Use any offer that the bank gives you against your credit card that lowers your interest payments, even a 1% lower monthly payment option will save 12% per annum on your borrowing!!
  • Last but not the least, if your near ones or friends can help you out, take this option !!

So credit card, in the end, is not easy or free money. If you can do without it, then it is the best option. However, if used with financial discipline, it can help you tide over the difficult moments. And use some of the tips above to eliminate / reduce or minimize interest payments to save your hard-earned money for a rainy day.

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