I used to charge absolutely everything to my credit card, even small purchases if I could. Swiping a card for me was as convenient as paying with cash and counting out coins. Here are six more reasons why.
Reason #1: It was useful for accounting my spending
Since I never used cash, or make purchases using my debit card, all my monthly spending was bundled into one report — my monthly statement.
Not only that but my current credit card categorised my spending for me, so at a glance I can see how I've spent my salary for the month and year-to-date.
Reason #2: It built up a great credit rating
By charging and paying off up to thousands in expenses each month, I had built up a high credit rating. So each time I went to the bank for a loan, I was accepted right away, and at the lowest possible interest rates, with no security deposits required.
Reason #3: I didn’t need to carry cash
I don’t have to make stops to ATMs to keep enough cash in my wallet, which is also one less thing to remember to bring whenever I head out the door. This also meant that the less I had to deal with storing and keeping track of loose change, the better.
Reason #4: Automated billing is great
Cell phone bills, utilities, cable, if I could sign up for automatic billing, I would. It didn’t mean I never looked at each carrier's statement to ensure the charge is correct.
But it does mean that on a monthly basis I didn’t have to worry about paying any bills, other than my credit card bill — they were already paid.
Reason #5: They provided free services and protection
From services like car rental insurance and extended warranty, my credit card provided extra services and protections.
These were perks I wouldn’t normally pay for, but benefited from. For example, purchase protection would replace a stolen new phone, or credit card insurance would cover any rental car accident.
Reason #6: I get frequent flyer miles
Since I started to charge all expenses to my credit cards, I have collected and redeemed miles for everything from dinners to multiple flights.
It’s easy to get started with travel rewards, but redeeming miles for travel isn’t. A cashback card will give you free cash just for using your credit card instead of cash.
However, the only way you stay ahead is by paying off every balance, every month. Any interest charges will eliminate any benefit or reward a card can offer. But this is where I slipped.
But now I don’t use my credit card as much anymore, here’s why..
Using credit cards and not paying them off monthly can be detrimental to your credit, like it did mine. This is how I learnt my money lesson the hard way.
During the months I faced a shortage of cash due to unexpected expenses, I would pay only the minimum due amount on my credit card account.
Although I did this with the aim of paying more of my remaining credit balance off the month after, I wasn’t able to. This recurring habit gradually drove my debt balance to snowball over time.
A key risk of using credit when you don’t have the cash to pay it off later, besides the high-cost interest, is the damage to your credit.
When it comes to using my credit card frequently, here are the six lessons I learnt and these drove me to not use my credit card as much as I did before, but use it more prudently instead.
Lesson #1: Credit discourages self-control
Financial planners often advise that an unwillingness to exercise self-control when it comes to money can rob you of financial security.
At worst, an impulsive attitude toward buying can have a negative impact on other areas of your life. Exercising restraint may be difficult and boring, but it also offers many rewards and advantages.
Lesson #2: Interest can be higher than you think
The reason that self-control is so important when it comes to finances is the simply because it’s practical. Credit card interest rates are high, making your purchases more expensive. For example, let’s say you buy something for Dh1,000 by using a credit card with an 18 per cent interest rate.
Let’s also assume that you make the minimum payment each month, then you will end up paying Dh175 in interest after one year and still owe Dh946 on your purchase. If you don’t have the money to pay cash for something in the first place, then you probably don’t want to make it more expensive by adding interest to the price.
Lesson #3: Rates can rise with unpaid balances
The annual percentage rate (APR) that you thought you had on your credit card may have been an introductory rate. What most of us often overlook is that this rate is subject to increase if the balance is not paid off in full.
That’s why an 8 per cent APR can easily skyrocket to 29 per cent in the blink of an eye. You might say that you’ll pay your balance in full as soon as it’s payday. You may have the best of intentions but can get easily derailed by unanticipated expenses, such as car repairs.
Lesson #4: Unpaid debt affects credit score immediately
If credit card balances go unpaid, then your credit score will quickly diminish and you may get an unexpected rate increase on your insurance bill.
Insurance companies that check credit scores when calculating premiums may assume that if you can’t pay your bills, then you might let your car or home maintenance slide, making you a higher risk.
Poor credit scores can generate other problems as well. Some employers run credit checks on job applicants and may not hire you if your score is too low.
And your credit score is particularly important when purchasing or refinancing a home because it will determine the interest rate on your mortgage, and even if you’re eligible for a mortgage as well.
Lesson #5: Financing leads to more spending
Many of us spend more money by purchasing unneeded or overly expensive items when they pay with credit instead of cash. Credit experts often reiterate how this is psychological, as buying a Dh1,000 laptop or smartphone won’t seem like a life change if you just sign a receipt and don’t even have to think about paying for a month.
On the other hand, you can physically feel the Dh100 bills leaving your hand if you pay with cash, giving you a better sense of how much those items cost and how much money you have left in your wallet.
Lesson #6: Higher debt poses risk of financial collapse
If you go on spending sprees without a plan to pay, or if your plan goes awry due to a job loss or an enormous medical bill, then you find yourself deep in debt.
Declaring bankruptcy will scar your credit history for up to 10 years, and when the report finally goes away, you have to build good credit all over again. Wondering how I got out of debt?
I solved my personal financial crisis by consolidating my debts. I took a much lower-interest personal loan and paid off my credit card debts in one go, while gradually building my savings in a few years.
Bottom-line?
The best practice for avoiding credit card fees and interest is to not spend money until you save enough to cover the purchase. Credit works well when balances are paid off each month, but it can be disastrous when poorly managed.
The convenience, protection, and rewards offered by credit cards make them handy financial tools, but consider the risks before getting in over your head.
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