We all do it — it's widespread. We find it practically impossible to conduct our daily affairs without using a credit card of some kind.
Selecting the right credit card, however, takes some careful planning, for the more you know, the more you may be able to save.
Recommendations from the National Bank of Ras Al Khaimah or RAK Bank, indicate that it is a mistake to believe that interest rates, credit limits, grace periods and other features are the same on all cards.
As the UAE offers such a considerable choice, GN Focus suggests a few points to ponder upon when going shopping for that all-important plastic.
Annual percentage rate
Defined as the interest rate for a whole year, rather than just the monthly rate, the annual percentage rate (APR) indicates the true cost of any card. Sales agents might promote a particular product at ‘only 2.5 per cent interest', but when expressed in yearly terms this becomes a rate of 30 per cent. On a borrowing of Dh1,000, annual interest would be Dh300. Credit card interest is the highest rate of interest on any loan.
Interest-free period
All cards offer a grace period from the date the monthly statement appears to the date the total outstanding amount must be paid in order to avoid interest charges. This period is usually between 20 to 50 days. After this period, interest is charged as a percentage of any outstanding balance. Also ask if interest on a credit card increases after six months or a year.
Minimum payment
This is the amount a card holder must repay each billing period. Usually around 2 per cent of the total balance, it works just like a loan repayment, but if the cardholder only pays off the minimum amount against his bill each month, the debt will increase in value as interest accumulates. In new expenditure that is regularly charged at a different rate; and the total amount payable increases rapidly.
Annual fees
UAE consumers are usually charged an annual fee to hold a card, except in some cases where salaries are transferred to the same bank. This can vary from bank to bank, starting at Dh200 or more. The status appeal of a platinum card may be attractive, but basic-tier cards usually carry no charges and are often free for life.
If a sales agent promotes a card that is ‘free for life', compare the interest rate on the product with others in the market — it may carry a higher interest rate instead.
Also, watch out for cards that waive their annual fee only for the first year. Using a low-introductory rate credit card can finance large purchases over a short time only if you are certain you will pay off the balance and are comfortable with the terms.
Charges and penalties
Credit cards have many types of charges, such as fees for cash withdrawals or balance transfers, charges for international use, penalty fees for late payments and fines for crossing a predetermined credit limit. These can be as high as Dh150 or more per charge, so make sure you read the terms and conditions before you sign on the dotted line.
Credit limit
The credit limit is the maximum amount of credit the bank will offer a particular customer. This is frequently a low single-digit multiple of a customer's salary. Spendthrifts who uses up an entire salary within a week of payday would do well to restrict their limit to a maximum of a single month's salary.
Incentives
In the crowded UAE marketplace, vendors have to provide value propositions to stand out from the crowd. Airline frequent flyer miles, shopping vouchers, free valet parking and golf lessons are some of the add-ons offered. Those who choose a card based primarily on incentives could end up paying more in fees or interest than the value of the freebies — the issuing bank has to recover its investment somewhere down the line.
Highly disciplined consumers will use a card only for emergencies. Sadly, few of us can admit to being truly financially disciplined. The best bet for prospective buyers who expect to settle their card bills in full each month is to take on a card with no annual fee and one that may have rebates or rewards that could offer some benefit. On the other hand, those who expect to carry a card balance most months should go for a card with a low interest rate and the right mix of rebates or rewards to justify any fees.
Choosing the right card is a big decision and should not be made in haste. Understand all the terms and conditions and ask questions before taking a card.
Used right, a credit card can be an asset rather than a liability.
