Don’t Let Reward Credit Cards Lead You to Bad Credit
card for bad credit
Today, credit cards come with different reward programs such as Travel rewards, Gas rewards, and Cash backs. These cards are meant to give its holders more benefits from their spending. Unfortunately, many reward credit card holders are in trouble. Instead of being rewarded, they find themselves stuck in debt and headache. The reason?
Stop Chasing Rewards If It Means Bad Credit
Charging expenses to your reward credit card just for the purpose of collecting points or earning rewards could be a dangerous habit. Don’t forget that credit cards with rewards carry higher interest rates and fees than non-reward credit cards. If you’re not careful about using them, you can easily get stuck in bad credit.
Most reward credit cards carry interest rates that range from 15% to 19% or more. Annual fees for these cards also range from $50 to as much as $80 or higher. Imagine paying $80 each year just to keep your reward credit card active. Furthermore, imagine paying an additional 19% interest from your total charges each time you carry over a balance for the next month.
Obviously, charging large purchases to your reward credit card can put you in big trouble if you can’t pay them off in full by the end of the month. For this reason, consumers are advised not to get a reward credit card if they intend to carry a balance from month to month. Before charging a purchase to your reward card, be sure that you can afford to pay it off in full on your due date to avoid the high interest. Otherwise, you’ll be better off with a non-rewards card if you can’t eliminate the extra costs of a rewards credit card.
Some card holders maximize their credit limit just to earn reward points more quickly. However, doing so can cause damage to your credit history. Maximizing on your credit limit can send a negative impression to creditors. To maintain a high credit score, financial experts advice all consumers not to exceed 50% of their given credit limit. More than this, using up your entire credit increases the risk of bad debt.
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Top 3 credit card sins
credit card, friend or foe?
A CREDIT CARD can be a good friend or your worst enemy. These grave mistakes will turn your credit card into your worst foe.
1. Not staying on top of interest paid
Most consumers are attracted by credit cards that have rewards like free miles or cash rebates. That’s fine as long as you pay off monthly balances in full. But if you’re what industry insiders call a revolver—paying just a portion of your balance—you’ll be easily hurt by interest charges. So, shop around for the best rates.
Also, check the annual percentage rate (APR) and not just the nominal rate. Figure out how interest is computed. Is it a straight computation based on your outstanding balance? Or is it based on your average daily balance? The formula can also be based on a shorter number of days, instead of a full 30 days.
2. Paying only the minimum
Pay in full. If you find yourself paying just the minimum every month, you’re spending more than you can afford. You’ll be slapped with hefty finance charges. A 20-year old with a P100,000 balance on his credit card, a 3.5% monthly interest rate and a 5.0% minimum payment, will still have debt when he retires at 65 if he pays only the minimum.
Now, if you have no choice but to pay the minimum, stagger your payments weekly and not pay the lump sum on the due date. This is because for many credit cards, finance charges are computed on an average daily balance. So with declining balances over the credit cycle, the average daily balance—and the interest charge—gets lower.
More importantly, cut back on your expenses. Manuel “Chut” Santiago, Jr., General Manager of UnionBank Card Center, says, “Credit card spending should be part of an overall spending plan. Cardholders should not spend more than what they can quickly repay.”
If your spending gets out of control, ask for a lower credit limit, or if things get worse, cut your card and pay in cash. Cecille Fonacier, Citibank Marketing Director, explains, “A credit card is a very convenient tool to have, if used responsibly. Remember that credit cards give you spending power, but not more money.”
3. Paying late
Pay your balances on time, every time. Even if you can only afford to pay the minimum, pay it on time. Late payments are costly as you’ll have to pay a late penalty fee of around 6% and a finance charge of 3.5% every month. Chut says, “Paying late or missing payments can quickly ruin your credit as well as increase the cost of maintaining the card.”
Now, if you miss a payment once in a while, ask to have your penalty fee waived. If you’ve been an overall good cardholder, you’ll get your wish granted. Remember, it never hurts to ask.
Source: Inquirer.net
