I'm not an avid fan of credit cards, but there's no arguing the fact that, if used wisely, they can be used to one's advantage.
Credit cards are indeed one of the greatest inventions of man. They make cashless transactions possible. They allow consumers to use the card issuer's money to acquire goods and services.
Of course, banks are happy to lend because loans generate revenues: high interest rates equal huge returns. Why do you think every bank in town cold-calls you and offer a piece of their credit card?
However, consumers often ignore the fact that they can actually use a creditor's money for free. Many people carry their balance from month to month, accumulating charges that double their expenses.
The business of credit cards is all about charges. The trick to avoiding the debt trap is knowing what the fees are and finding ways to get around them.
Firstly, keep these three basic rules in mind:
1. Never go beyond the grace period
2. Avoid cash advances; and
3. Stay within the limit.
A grace period is the amount of time within which a customer must pay back funds to avoid finance charges. For example, if a customer had Dh2,000 worth of purchases and paid it in full before the due date, no extra fees would be applied.
Once the grace period, normally 20 to 28 days, is over, the charges start accumulating. When you miss a grace period, be ready for all sorts of fees to come out of nowhere.
For one, there's a late-payment fee that is charged on your account.
Banks in Dubai impose a fixed late fee of between Dh100 and Dh165.
Then, there is the interest — the percentage of card expenses that the bank charges you for using their money. In Dubai, rates hover between two per cent and 2.99 per cent.
Note that interest charges in the UAE are actually more expensive compared to other markets. Banks here usually impose one interest rate for all customers, regardless of their creditworthiness.
And the interest is charged monthly, not annually.
So, two per cent per month is not 24 per cent a year. The real rate is almost 30 per cent annually, a far cry from the 14.6 annual percentage rate in the US and 18.8 in the UK.
Bear in mind that the interest charge is still assessed on the outstanding balance even if you pay the minimum amount due before the end of the grace period.
So, even if the banks require that you pay only five per cent, make sure you pay in full what you have consumed.
Now, just because you always pay your bills in full before the due date doesn't mean you're exempt from any other charges.
Most banks charge interest on cash advances, which are not covered by grace periods.
So, avoid cash advances, if you can.
Some banks collect annual fees, while others don't. Make sure you get your plastic money from providers who waive this type of charge.
Finally, there's the credit limit to keep in mind, always. Sometimes, creditors increase and lower credit limits without prior notice.
Monitoring your limit on a regular basis is a habit you need to keep.
Not knowing how much you can spend without a penalty can be costly. Penalties cost more than Dh100.
So, if your credit card issuer is generous with the grace period and spending limit, collects low finance charges and doesn't require annual fees, you're in luck. If you constantly make an effort to fight impulse spending and stick to the three basic rules mentioned here, you'll be able to reap the real benefits of plastic money.
