Mon | Oct 15, 2018

Letter of the Day | Don't be a slave to your credit card

Published:Friday | December 15, 2017 | 12:04 AM

THE EDITOR, Sir: 

Credit cards, if used correctly, can be an essential tool in the management of your finances. The problem is that some persons get a credit card and are not prudent in its use, which may result in a debt from which it is difficult to recover.

After months of paying compounded interest charges and feeling as if they are under the water, they opt to get a loan to clear the credit card balance. For some persons, this is a cycle, and once the card is cleared, the action is repeated. This may feel like your credit card is taking control over your finances. The issue is that one cannot repeatedly do the same thing and expect a different result.

Using credit cards correctly is similar to having a temporary loan ranging from a maximum of about 50 to a minimum of about 19 calendar days. On your printed credit card statement, there are two important dates to be aware of – the statement date and the payment due date. The statement date marks when the financial institution closes all the transactions since the previous statement was produced, this generates the amount due on your bill. The payment due date is the final date on which you can make the payment.

Set an alarm for the due date in your smartphone with a reminder two days before. Ignore the minimum payment amount and ensure that you pay your bill in full on or before the due date. By doing so, the credit card holder pays no interest to the bank.

The minimum payment amount on your credit card statement looks very attractive. Don’t be fooled! This carries interest charges that are compounded over the months. This simply means that each month, having only made the minimum payment, the next month, if you do not pay off the balance in full, you will be paying interest on interest. These charges accumulate quickly, given that credit card interest rates can be as much as 51.9 per cent per annum, or 4.33 per cent per month.

Do not spend more than you earn! The first step in the proper management of credit cards is to understand that the temporary loan facility must be factored into your monthly budget. While the bank sets your credit card limit, you must establish your personal limit, that is, the amount that you will be able to pay in full once the statement is generated. In other words, if your monthly budget is $20,000, your total expenditure in cash AND card should not exceed this amount.

Once the credit card balance is paid in full, you accrue no interest charges; you only pay for what you have spent. When you receive benefits such as cash back or travel miles, given that you have paid no interest, this means that you have gained from the credit card company. However, your overall net gain is the benefits less the annual credit card fee. Said another way, when the balance is not paid in full and interest charges are applied, you only truly gain if the benefits are greater than the interest charges plus the annual credit card fee.

Control your credit card; don’t let it control you!

MELVA ARMSTRONG

​ Lecturer in Finance, UTech

mejarmstrong@yahoo.com