Dubai: With credit cards being widely accepted everywhere you go, it seems unnecessary to carry cash or even use your checkbook.
However, using credit cards can be a costly affair. If you miss one or several payments, banks are quick to charge late payment fees and the interest rates can cost you a house in the long term.
Studies have shown that consumers spend billions of dollars on credit card fees and interest charges in one year. A research released in Australia last year found that fees and charges from credit card use are costing consumers $7.6 billion in just 12 months.
The reason? Cardholders are not using their plastic money properly.
“Credit cards are notoriously difficult to understand as there are so many different ways that providers calculate fees and interest charges, as well as the types available. The typical cardholder can get bogged down in the fine print or not read the details that matter the most,” said Michelle Hutchison, money expert at creditcardfinder.com.au.
There’s no relevant data on how much people in the UAE are spending on credit card charges and fees , but with interest rates reaching 32 per cent to 36 per cent every year, improper use of credit card is likely costing consumers as much.
“Credit cards are the most expensive form of finance with interest rate in the range of 32-36 per cent per annum. In that sense, any credit card bill paid partially involves that kind of interest,” said Preeti Bhambri, founder of personal finance site MoneyCamel.com.
To avoid incurring hefty charges and face the risk of a jail term, it is important for cardholders to keep in mind that there are certain purchases, no matter how high their credit limit is, that should be completely avoided.
The following should not be paid with a credit card:
1. Down payment for a property
Don’t let the high credit ceiling on your multiple cards tempt you into making huge cash advances just so you can afford the down payment for a property back home. “Buying a home should be a planned expense,” said Bhambri.
“A house is an asset you cannot liquidate easily. It is best to avoid using high interest and short-term payment methods like a card to fund it. Besides, using a credit card also spikes the average rate of interest considering that a card carries an interest rate of 3 per cent per month.”
2. Housing rent
A lot of people end up borrowing money from friends or even using their credit card to pay for their rental dues because their salary for the month has not been released yet. This is particularly true with UAE residents renting a room or a bed space on a monthly basis. This is a bad habit that needs to be stopped right away. “This is a big expense and it blocks most of the card limit, thereby forcing you to pay 3 per cent per month,” said Bhambri.
It’s so convenient to reach out for the plastic money when you’re refueling at the petrol pump. After all, fuel is not that very expensive in the UAE compared with how much other motorists are paying in other countries. The bill may not max out your credit card, but the surcharge could dent your wallet in the long run. “Most cards have a surcharge of 1 per cent on your fuel bill,” warned Bhambri.
Payday is just several weeks away and you need to buy your daughter or wife a nice necklace. Bhambri said it’s not a good idea to use your card if you find yourself in a similar situation. Even if you’re certain you can pay your credit card dues in full before the fees kick in, you could still be paying extra if you use your card. “Most jewellery outlets levy an extra charge of 2 per cent to 2.5 per cent when using a card,” she said.
5. Purchases abroad
Many travelers unwittingly incur huge expenses when holidaying abroad, especially when they use their plastic money every time they walk into a restaurant or fancy something at the souvenir shop. Aside from failing to track their expenses, one of the most common costly mistakes made by travelers is racking up huge credit card charges. Banks usually charge between 2 per cent and 3 per cent as conversion rate every time you swipe your plastic money abroad. “Even ATM withdrawals abroad attract the same fee,” said Bhambri
However, if you do need to use your plastic money to pay for your expensive dinner at the Champs Elysees in Paris, make sure your credit card offers you the chance to earn some cash back of more than 3 per cent. "Some banks even hike up the cashback on international use up to 10 per cent during summer. If the credit card used does not offer more than 3 per cent cashback, then it is not worth using it abroad," said Bhambri.