How Can You Use Your Credit Card Effectively?

Thin, rectangular, a piece of plastic or metal ‒ that’s the ubiquitous credit card.

You swipe a credit card to pay for your purchases at the point-of-sale (POS) terminal or enter its details during online transactions, just like you use a debit card. However, while money is deducted from your bank account in the case of debit cards, it is deducted from a pre-approved limit on your credit card that the credit card company decides based on your credit score and history.

A credit card extends a short-term loan based on your credit score, possibly without interest. When you pay back the loan on time, you get another short-term loan, and you enhance your credit score – isn’t that awesome? Well, that awesomeness is what a credit card is all about.

When you purchase from a merchant using a credit card, you cannot use your own money; you borrow the credit card company’s money. The merchant, the credit card company and the card network (such as Visa or Mastercard) coordinate electronically and almost instantaneously to authorize and process your payment. Of course, you will have to repay the credit card company. However, the best part is that you can avoid paying interest, depending on the timing of your payment. Moreover, there is a limit to what you can borrow. This limit is decided by the credit card issuer, depending on your credit score, income, and account history. So, when you make a purchase, the amount is deducted from that credit limit. When you pay it back, you may get back your credit. In addition, your credit score can increase or decrease depending on how you use your credit card.

As Uncle Ben said to Spider-Man, “With great power comes great responsibility.” Credit cards are a lifesaver when utilized judiciously with financial wisdom. When not used effectively, one may fall into a debt trap.

So, are you wondering how to use a credit card effectively?

Steps to Use Credit Card Effectively

• Reading your credit card statement is of utmost importance. It contains your card balance, available credit limit, purchases you made during the statement’s billing cycle, the minimum payment due (always a good idea to pay more than the minimum if you can), and the payment due date. The statement also shows what it will cost to pay off the balance over time with interest.
• Now, here’s the blessing – a credit card comes with a grace period, typically 20 to 30 days, by when you have to make the payment on a purchase so that interest is not charged. There can be an additional 15 to 20 days between the statement generation date and the payment due date. Hence, the payment can be interest-free for up to 50 days. If you don’t pay the total amount, interest accrues based on your card’s Annual Percentage Rate (APR), which reflects the interest rate for your card, along with any fees the card charges, is annualized as a percentage.
• A credit card may have separate APRs for purchases, balance transfers, and cash advances. Some cards even have promotional APRs for a limited period when you buy a new card.
• Use your credit card in the following way to boost your credit score while controlling your costs in terms of interests and fees:
• Paying your bills on time is the most crucial tool for enhancing your credit score. Delaying payments or missing them can severely damage your credit score. You can schedule automatic payments from your bank account or even set up due-date reminders to avoid paying late.
• Understand the APR/s of your credit card and how interest is charged on various purchases. Moreover, you should note that payments are applied differently for balances with different interest rates. Anything paid over the minimum is applied to the balance with the highest APR first.
• Watch out for the expiration date of a promotional period because the remaining balance beyond the expiry is subject to the regular APR.
• A credit card may come with numerous fees such as annual fees, late payment fees, balance transfer fees, cash advances, foreign transaction fees, etc. Nevertheless, all the fees and APRs of a credit card can be found online on the credit card company’s website. Make sure you read these before applying for a credit card. These should also be there on the card agreement. Compare the annual fees with the card’s reward program or other benefits. For example, you can use a credit card that charges minimal foreign transaction fees while travelling. Some credit cards even come without annual fees.
• Using the right credit card for the right purchase is a brilliant trick for maximizing reward points if you hold multiple credit cards. For example, use a travel credit card for booking flights, hotels, etc., and use a fuel credit card if you spend substantially on fuel.
• There are credit cards in India through which you can convert your balance credit into an emergency personal loan for an interest-free period.
• You can convert your purchases through a credit card into EMIs for repaying them affordably.
• Learning how to use a credit card online can give you 2x or more reward points.
• Don’t forget to redeem your credit card reward points to get discounts on flights, hotels, shopping, recharges, or even cashbacks.
• Finally, check your free credit reports periodically to ensure that your credit card activity is reported correctly and to spot potential fraud or identity theft if your card is ever lost or stolen.

And yes, an expert tip: Don't try to be that person who uses a credit card to pay off another credit card.