Wise Usage of Credit – Part 1

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Using your credit card wisely may be one of the most important steps you can take towards keeping your financial health in check. A credit card is like a kitchen knife. It has many benefits, but if used wrongly, you can cut yourself!

What is a credit card?
A credit card is an electronic payment tool which allows you to purchase products and services without the exchange of cash.

How does it work?
The credit card issued to you will come with a line of credit called a credit limit, which is predetermined by the card issuer. When you use the card, the credit card issuer will first pay the merchant on your behalf and bill you later. Generally, you are given between 20 to 50 days interest free period from the date of your purchases to settle the outstanding amount.

Benefits of a credit card
A credit card can be useful payment if you know how to use it wisely. Some of the benefits of a credit are as follows:
• It is a convenient mode of cashless payment
• Enables purchase of products and services online including airlines ticket
• The statements will assists you to track you spending for budgeting purpose
• Some credit cards provide free personal accident and travel insurance coverage
• Attractive schemes, such as zero-interest instalment plan, flexi-payment scheme and balance transfer
• Earn loyalty points to enable you to redeem goods and or services

What to look out for in a credit card?
Before using your credit card, you should understand some of the terms and conditions outlined below.

Credit limit
This is the maximum amount of credit that you can charge to your credit card. Once you hit the limit, you will not be able to use your credit card unless you pay off some of the outstanding balance.

Generally, the credit card limit given is 2 to 3 times of your monthly income. If you use your credit card up to this limit, you are effectively spending at least 2 to 3 months of your income in advance.

Interest free period
You will enjoy an interest free period on the purchase made through your credit card if you do not have unpaid payments due from the previous billing cycle. This interest free period is usually 20 to 50 days from the posting date of the transaction.

If you make partial or minimum payment of the amount due, you will be charged interest for all purchases made from the day the transactions are posted to your account.
This means that if you do not make the full payment on your credit card bill for a particular month and carry forward the balance to the following month, the interest free period would not be applicable. Interest charges would be imposed on your next transactions and compounded on a daily basis until you settle your outstanding balance in full.