Like anything else, credit cards can either be used responsibly or they can be abused, but contrary to popular belief the cards themselves are not evil.
Depending on how they are used, they can either help or harm their owner.
This article will attempt to demystify credit cards and bring you the facts, helping you become the master of your credit card – rather than it being the master of you.
Credit cards are undoubtedly one of the most ingenious inventions of the financial services industry because they provide instant credit limits.
The origin of the credit card can be traced back to Frank McNamara, who founded Diner’s Club in 1950, marking the launch of the world’s first independent credit card company. How else can you get instant liquidity, as and when you need it?
Once you qualify for a credit card, a certain amount of money is literally accessible to you anytime, anywhere, day or night – provided the merchant accepts it as a valid mode of payment.
But contrary to what some may have you believe, banks don’t want you to be saddled with financial obligations.
Banks want their customers to maintain good saving and spending habits.
It doesn’t benefit anyone – banks, customers or the economy at large – when the public’s debt is too high.
If you are the type of consumer who has a tendency to overspend on your credit card, the best approach is to settle all your obligations when they are due.
This is the easiest way to manage your card and keep track of your spending.
You can create a standing payment order so that all your purchases are settled during the month in which they are billed.
However, when you do this, you don’t get the full benefits of your credit card.
They are called credit cards for a reason. If you don’t want to use credit, that is what debit cards are for.
If you want to use credit cards sensibly as a payment tool, and get the full benefit from them, this is how to do it.
Keep track of your billing cycle. When does the billing period begin?
If it begins on the 15th, that is when you should save your biggest expenditure for, because you get the maximum grace days to repay the amount due.
On the 14th, you are only getting one day’s grace period. You may as well pay cash. When the amount is due, you may choose to pay the minimum required and then pay the rest later.
Sometimes you may need to spend extra money for emergency reasons, in which case paying the services fee may be worth it in exchange for having access to the cash when you need it. But if you have cash available, why pay extra?
Another point to consider is late fees.
You should try to settle your credit card bill in full by the due date. If you are late even by a single day, by BD1 or less, you will be charged a late fee – which can range from BD8 to BD20 per defaulted cycle. Credit card charges are still, in my opinion, a fair price to pay in exchange for instant credit at your fingertips, provided you use your cards responsibly.
Financial literacy is something that should be taught from a young age, so children are comfortable with banking services and responsible for their money.
Adults, too, are encouraged to maintain an ongoing dialogue with their banks so they are always aware of the newest and best service available.
In addition, credit card issuers offer a range of rewards to cardholders, including special offers on discounts, flights, dining, lounge access, draw entries and, in the case of upper tier programmes, even cash back for every certain amount spent.
On the other hand, paying with cash gives you nothing extra at all.
* Mohammed Buhijji is head of retail banking at Al Salam Bank - Bahrain