Credit cards seem like god-send when you have no money in your bank account, yet some emergency spending comes up. Credit card allows you to manage your finances during the lean period when money in your bank account is limited. When used wisely, credit cards can help you manage your finances well.
Free Credit Money
Credit cards have a monthly billing cycle. Any money spent during the billing cycle is computed into one bill and sent to you for payment. When making big purchases, it allows you to benefit from the interest-free period. You literally get free money till the credit card bill is sent to you.
Assuming you make a purchase of Rs 1 lakh at the beginning of your billing cycle, your credit card company is providing you free money for 30 days. At 8% annual interest, you just saved Rs 667. Cool, isn’t it?
Why do credit card companies give you this free money? They are in the business of money transactions and charge merchants a certain percentage (2-5%) for each transaction. This is one of the major sources of income for these companies. That’s why they can provide you the interest-free period until your bill is computed.
Credit Money Trap
Credit money is good when used wisely. When misused, it can get you into a credit trap and bleed you financially.
Credit card companies are in the business of lending money through their credit cards. When you pay your bills fully on time, they just get to benefit from the transaction charges earned from the merchants.
Credit card companies give you the option of paying a minimum amount against your credit card bill and carry forward the balance amount. That’s where the trouble starts. Once you choose to defer payment of your credit card bill, they start to earn real money through hefty interest levied against your pending bill amount. Currently, the interest charged by credit card companies is about 3.5% per month, which means a whopping 42% annually.
Unless inevitable, never leave any balance amount pending for payment against your credit card bills. If you do so, you start paying hefty interest charges. Not only this, when you have uncleared balance against your credit card bills, there is free credit period provided for future expenditures. Any new spending using the credit card also gets accounted as pending amount and interest calculated on it for the period it remains unpaid.
Convert Balance into Loan
Credit card companies give you the option to get a loan against your card or convert big spendings into a fixed-tenure loan. If repayment is not possible, just call your credit card company and ask them to convert the balance amount into a loan. This will help you bring down the interest cost from 42% to just around 18%. Never let your credit card bill get rolled over. Use the loan facility instead to avoid exorbitant interest cost. If converting credit card balance into a loan is not an option, get a personal loan to pay your credit card bill.
Make sure that you use your credit cards wisely. Pay your credit card bills on time.