Your Guide To Credit Cards In Sri Lanka
Compare & Apply Credit Cards from various categories such as Travel, Shopping, Rewards, Cash back, Premium, Balance Transfer, Benefits and Fees etc. To choose the right credit card for you, you need to look at how you plan to use it, your current financial situation and your future goals.
A credit card is a short term loan that is issued by financial institutions or banks to the account holders through which a person can pay for goods or services. To avail the facility of credit card, you need to have a good credit history with the bank and appropriate monthly income. Once the bank reviews both these things, it approves credit card and decide the maximum limit to be spent. The process is different for every individual and each bank has its own terms and regulations.
As a credit card gives you a good limit, it can be used for daily expenses or short term finances. When you are short of money in your bank account, you can use credit card as a substitute for expensive purchases. But to avoid any type of extra interest charges, the used amount has to be put back within 30 days of purchases or some banks provide 50 days facility to repay the credit money.
For long term expenses, credit card is not a good thing. The interests are really high if you fail to pay the credit within the stipulated time. Also, some credit cards charge 18% interest rate which is why you should avoid using it for long term. Rather go for a personal loan if need arises as you can get that at 5%, maybe.
Simply put, a credit card helps you when you don’t have sufficient funds in your account to fulfill your needs or luxuries. As you use money in the credit card, you have to pay it back later within 30 days and if not, you have to pay some interest by paying back the minimum amount. Plus, credit card has nothing to do with your bank account and you are free to spend up to the credit limit.
A debit card is also called ATM card which works according to your bank account. Through debit card, you can withdraw or use only that much of amount which you have in the account. Whenever you use the debit card, your account gets debited so make sure to maintain enough funds before you pay for anything.
There are many people & institutions who would recommend that you get a credit card, but before you do consider, it’s critical to provide yourself with the knowledge on how to use one to avoid getting yourself in an expensive pile of debt. A credit card can offer you many benefits through its features and can be a great tool to manage your finances and a credit card is a great alternate option for cash provided that you are able to repay the amount you spend each month. However, if you are not careful, you can get yourself into the credit card trap.
- It’s safe to carry around than a wad of cash
- You get to enjoy extra benefits including protection on your purchases, cashback, air miles and rewards, and discounts or promotions with retail outlets or restaurants
- It can be good for your credit score to build credit history, which is needed when applying for other personal finance products such as loans and mortgages
- It can also help you pay for expensive purchases with a 0% interest easy payment plan that splits your lump sum payment into affordable installments over duration of months or over a few years.
Our comprehensive guides on financial products such as credit cards, personal loans etc. will help you to equip you with the necessary information you need to avoid landing yourselves in huge amount of debt traps.
How Do Credit Cards Work In Sri Lanka?
Much like personal loans, credit card works. In Sri Lanka, when you buy something using the credit card, basically you borrow money from the card issuer which needs to be repaid back by the end of each month. You have to pay the whole amount you have borrowed or else an interest is charged on unpaid amount.
Credit cards, no doubt are good to help manage your finances and can earn you a good credit score if used properly. But if you fail to understand how it works, you will find yourself trapped in a bigger debt.
Let’s read in detail about the components of how a credit card works:
For Purchases: To purchase anything using credit card is a simple process. You can buy things online or offline by entering the card details while making payments. For online purchases, provide your credit card details and the payment will be processed under proper security checks. The transaction may fail if you have exceeded the credit limit. To shop something at land based stores, you need to swipe the card or tap it at the payment terminal and the transaction will be processed with your signature or PIN number. Enjoy a hassle free shopping experience with credit card. Here are five parties involved in the entire transaction process:
- Cardholder: A cardholder can be any person i.e. you, your wife, your children or any other person.
- Card issuer: Banks, financial institutions and consumer finance companies are the issuers.
- Credit card network: Organizations like Visa, American Express and Master card act as the middlemen between the banks and merchant acquirers. They set up the payment system to make shopping a seamless experience.
- Merchant: Any company or website that accepts credit card to make payments.
- Merchant acquirer: Banks or institutions are the acquirers as they process credit card transactions for merchants with the help of POS terminal.
Credit card repayment:Paying back the credit card money is important or else you will end up having big debts at end of the year. Also, if you don’t pay the full amount back within the grace period of 30 or 50 days, the bank will charge some interest on the outstanding amount. So to avoid paying the interest, it is recommended to repay the whole amount or at least the minimum amount. Not paying back the full amount entitles you to pay extra costs in the form of interest rate.
Despite the fact, Sri Lanka is still not being a matured market around diversified finance products compared to rest of advanced economies, there are several categories of credit cards, each with different features and functions. In Sri Lanka, following are the commonly found categories of cards you can consider applying for:
- Balance Transfer Cards: A balance transfer is the process of transferring your debt from one credit card to another. This process is usually done to save on interest payments each month.
- Rewards credit cards: These cards give you reward points for transactions made using your credit card. Reward points are redeemable for gifts, vouchers and other goodies as indicated in the issuer’s reward catalogue.
- Cash back credit cards: These cards gives you back a percentage of the amount spent, which is paid back to the credit card holder.
- Low interest: These cards offer lower interest rates compared to conventional cards.
- Travel credit cards: These cards give you mile points for selected transactions. Mile points are redeemable for travel-related privileges, such as air tickets and seats upgrades with participating airlines.
- Premium: Premium cards offer promotions and privileges that focus on higher-end products and services.
- Bank of Ceylon Credit Cards
- Commercial Bank Credit Cards
- DFCC Bank Credit Cards
- Hatton National Bank Credit Cards
- Nations Trust Bank Credit Cards
- NDB Bank Credit Cards
- Pan Asia Bank Credit Cards
- Peoples Bank Credit Cards
- Sampath Bank Credit Cards
- Seylan Bank Credit Cards
- Standard Chartered Bank Credit Cards
- HSBC Credit Cards
- You can own a credit card and enjoy a host of benefits, such as short-term, zero-interest loan for every purchase, no worry of carrying various currency denominations as it is a useful alternative to cash.
- It helps in building the credit score/history which will help obtaining other financial services such as loans etc.
- A grace period, or a minimum number of additional days within which a cardholder can make his credit card bill payments without incurring any interest or financial charges is offered.
- Credit cards give the card holder the option to make payments in domestic as well as in foreign currency.
- Every credit card has a credit limit that is set on the card. This limit is determined after analyzing the credit worthiness of the cardholder.
- It offers various features, such as reward points, gift coupons, vouchers, cash back and extra discount on purchase.
- There is a specified credit limit for purchases and for cash withdrawals with credit cards.
- Credit card balance transfer allows the card holder to transfer outstanding balance in a credit card account to an account held at another credit card company.
- Alternative to cash: Rather than carrying liquid cash, it is always good to keep a credit card. Firstly, it is safe and you don’t have to worry about theft or robbery of cash.
- Emergencies: In emergencies, a credit card can help withdraw the cash immediately from any nearby ATM.
- Making big purchases: You can also pay bills using credit cards. To buy expensive things or make big purchases, credit card is an amazing option. With this, you can breakdown the big amount into easy installments to pay month by month. Also, you can pay energy bills or phone bills with a credit card.
- Build your credit score: If you want to take any type of loan in future, getting a credit card proves beneficial as it increases your credit score. The more loyal you are towards repaying your credit card dues the more chances are there to build a good credit history. Not having a credit history prevents you from getting loans as most of the banks reject such applications.
- Welcome Offers: Many banks and financial institutions offer welcome discounts or rewards to lure the customers into taking a credit card. These offers are for limited time duration so when you apply in that time, you get eligible to avail awesome welcome perks.
- Reward Points or Cash Back: Every time you make a purchase on your credit card, you receive a few reward points or a cash back reward credited to your account. The reward points can be accumulated to avail various free gifts, while cash back rewards are directly applied to your card account. Reward points or cash back gets credited in your account whenever you make a purchase. These reward points can then be redeemed to buy something of that particular amount or also can use these points to pay back the used amount of credit card.
- Secure Transactions: Transactions performed by credit cards are secure and safe due to a feature called chip and pin system. While making online payments through credit cards, the payment gateway runs a two tier authentication in which apart from the basic details, the cardholder has to enter an OTP to complete the transaction. However, this feature saves your card from any misuse as if anyone tries to do so, you will get an OTP and that fraudster cannot complete the transaction.
- Track your purchases: Keeping a proper record of cash transactions is difficult but with credit card, you can always download the monthly statement to see all the expenses and maintain a track record.
- Misuse can ruin your credit score: Since your spending and repaying habits decide the credit score history, misuse must be avoided. If you are latecomer in paying the credit card balance, it will definitely affect the score.
A supplementary card is an additional credit card that is issued under the principal account holder’s name upon request. As the principal account holder, you can decide who to give the supplementary card to. However, a supplementary card holder must be at least 18 years old and most times this is given to your spouse or to your child.
A supplementary cardholder does not need to fulfill the minimum requirements as per principal account holder, which makes it a perfect option or your spouse who may not be working or your child who needs a card for emergency cases
Visa, MasterCard and American Express do not issue credit cards, it is issued by banks or financial institutions. Visa, MasterCard and American Express are known as payment networks, they’re essentially the network systems that allow for processing of credit card transactions. They earn money off each transaction. As a cardholder, you won’t find big differences between Visa and MasterCard.
However, American Express (Amex) is somewhat different.
As an overview, some of the benefits of these payment networks include:
- Global Customer Assistance Services 24/7 no matter where you are in the world so you can report problems or lost/stolen credit cards.
- 24/7 Concierge services including helping you to make last-minute dining reservations, flight reservations to name a few for premium segment.
- Exclusive Deals and discounts to your card type & Exclusive access to airport lounges, golf clubs, and premier hotel memberships
- Globally accepted by millions of merchants around the world.
- Global ATM network allowing you to withdraw cash when you need it.
Eligibility Criteria for Credit Cards in Sri Lanka
The general eligibility criteria to avail a credit card in Sri Lanka are as follows:
- If you are applying for a principal credit card, you must be above 21 years
- The minimum income requirement is LKR15, 000.
You will have to submit the following documents while applying for a credit card:
- A copy of NIC or passport
- Latest 3 months’ salary slip for permanent employees
- If you are self-employed, you must submit a copy of Business Registration and latest 6months’ bank statements.
There are several ways to apply for a credit card in Sri Lanka and the card approval process usually lasts between one to two weeks. Banks will verify your personal details, credit ratings, legal cases, payment history, and other relevant financial details before approving a credit card to you.
Things to do before and ways to apply for a credit card
- Do your research: Based on your lifestyle and budget, you can find a right credit card. Do some research and get one: Never miss out on checking the additional benefits you get with the card. Any type of charges or reward points must be assessed to determine if you actually need a credit card. If yes, you should know whether you will get any travel miles or cash back on your purchases.
- Check your credit score: Credit card may get rejected or accepted based on your credit score so make sure to maintain a good record with the bank. If you have a bad credit score, it will take at least 6 months to look good to the bank in order to approve your credit card.
- Apply online or at a bank branch: Once you are done with all the research about the right card for you, it’s the time to apply for it via bank branch or online mode. Open the website and submit all the required documents and wait for the approval. Online applications are processed fast and take less time than offline mode. But if you are not so aware of online media, go to the bank with all the documents ready and ask the customer service representative to apply your credit card. You can choose to walk into any bank branch nearby your area and fill up the forms to apply for a credit card. You will need to bring your identity card and required documents including three months’ income statement (pay slip and also three months bank statements
- Five.lk comparison portal: You can quickly search, compare and apply for your preferred credit card at any time across any device. Our intention is to provide you with the accurate & insightful information around financial products in the market.
- Credit card agents: Sometimes you may find credit card agents at popular crowded places such as supermarkets, shopping malls etc. However, it is quite hard for you to compare and choose the best credit cards given the short period of time to communicate with these agents.
- Bank Call centers: You can call the bank’s hotline to apply for a credit card and ask for the consultant or assistant’s work email address to send over your confidential documents. Sometimes, your banks may call you to ask if you are interested in applying for certain credit cards from time to time.
If you have received a notice from the bank that your application is declined, there could be a few reasons contributing to it. However, it is best to consult the bank to find out the specific reasons so you can resolve them quickly.
Several reasons which could lead to the rejection of your credit card application by the bank include:
- Insufficient supporting documents
- Insufficient income level
- Bad credit score due to high debts or inconsistent loan payment pattern
- Too many credit cards
- CRIB credit report discrepancies
Ineligibility due to income:
A credit cardholder has to have the required monthly income and if you don’t meet that, the card may get rejected. Every card issuer has different requirements so search for those issuers who are aligned with your income to get an approval.
Residence/ Office location: Some banks have blacklisted areas depending on their customers’ activities so make sure you don’t come in that area while applying for a credit card. To get an approval on credit card issuance, your residence or office location plays a major role.
Incorrect Information: Incorrect, irrelevant or incomplete information can lead to rejection. The banks are extra cautious when it comes to issuing credit cards so make sure not to give any wrong information. Double check your documents and application form or else your request will be rejected without any information.
Discrepancies in the credit report: Things take time to reflect in your account so before applying a credit card, make sure to check your CRIB score and report to keep everything correct at your end. Sometimes, your previous debts are still there which have been cleared but not updated. In that case you might get rejection so before it happens, inform the authorities about the same.
Bad credit history: Having bad credit history definitely lands you in a serious problem and you are considered as a risky customer if:
- Too many loans: Having too many loans is a problem as the issuer doubts your worth and repayment capabilities.
- Too many credit card applications: Another major factor that leaves the issuer in doubts is having applied for too many applications.
- Excessive credit card usage: If you are a person who has the bad habits of carrying the monthly limit over to next months, it is a bad impression. Or if you excessively use your card up to 50% of the credit limit on various cards, your application is liable to get rejected.
Credit Score: The most common reason for the credit card application rejection is the credit score, as already told. Having bad debts, bad repaying habits, delay in making monthly payments, exhausting the credit card limit all lead to rejection. Being financially unstable i.e. using 50% of the credit limit on various cards or not having a minimum balance in your account affect the credit score which in turn impacts the credit card application process. Through your credit report, banks will be able to see your financial history of up to six months, so make sure you credit reports is updated from time to time and contact the credit rating agency if you need to update or make amendments.
Credit Card Interest Rates In Sri Lanka
Sri Lanka’s banks have recently raised the interest rates on their credit card and several other loan products as the Central Bank gave them the green light to price their loans to reflect market interest rates. Therefore, In Sri Lanka, credit card interest rates are commonly ranging in between 24 - 28% p.a.
-
Bank
Interest Rate (p.a.)
-
Bank of Ceylon Credit Cards
28%
-
Commercial Bank Credit Cards
28%
-
DFCC Bank Credit Cards
28%
-
Hatton National Bank Credit Cards
28%
-
Nations Trust Bank Credit Cards
28%
-
NDB Bank Credit Cards
28%
-
Pan Asia Bank Credit Cards
28%
-
Peoples Bank Credit Cards
28%
-
Sampath Bank Credit Cards
28%
-
Seylan Bank Credit Cards
28%
-
Standard Chartered Bank Credit Cards
28%
-
Credit card payments in Sri Lanka
You can pay the amount due in full before the due date, this way you will not be charged any interest. The right way to use a credit card is to make the payment in full each month. When you aren’t charged any interest, you can accrue substantial rewards. It will also help you build a good credit score when you are paying your balance in full every month.
If you are carrying over the balance for the next month, you will be charged interest on the balance. The interest for cash advances is higher than the interest charged on the purchases of goods and services.
If you wish to enjoy no interest on your credit card, you will have to pay the balance in full. The banks and credit card companies will wait for two billing cycles to determine if the interest will be waived off. You must ensure that you are paying the balance in full before the due date, otherwise you will not get the interest waiver if there is interest of the previous month carried forward.
Although credit card is quite handy, it can push you in a terrible condition due to inappropriate or improper use. Follow these things before you choose a credit card:
So when you choose a credit card, here are important things to consider:
- Spending habits
- The interest rate
- Credit limit
- Fees and penalties
- Balance computation method
- Incentives
Spending habits: Before you take a credit card, you have to analyze your spending habits. If you are a person who is fond of frequent shopping or likes to spend on luxury items but have the habit to carry balance from month to month, then credit card might take a dig on you. For what purpose do you want to use the credit card? Do you need it for emergencies or for every small thing you need?
- If you are a person who pays the bill on time and do the same for credit card also, then go for a card without any annual fee and a longer grace period. For you, interest rates don’t matter at all
- If you have the habit to carry on the balance, you need a card with lowest interest and introductory offers.
- Take a credit card having rewards program feature and good credit limit if you are going to make it the major part of your purchases.
- A low interest card is best for a person who is going to use it for emergency purposes.
The interest rate: The interest rate on a credit card depends on various factors. It is called as annual percentage rate which is of two types i.e. fixed and variable. A fixed rate credit card allows you to know the interest rate that will be charged from month to month but in variable rate credit card, the interest fluctuates. If you pay your credit card amount before or late, or go over the stipulated limited, even the fixed rate can change. Also, the card issuer can change the rate if he wants by notifying you about the change.
Credit limit: The credit limit is the amount which you can spend in a particular duration and this limit is decided by the card issuer. You can borrow any amount depending on your credit history with the bank. It is always suggested not to go close to the credit limit or else it will ruin your credit score and the bank will cut your limit to the minimum balance of your account. Also, if you go beyond the credit limit, a penalty is charged.
Fees and penalties: Penalties are quite a common scenario with a credit card as the card issuer never leaves any chance to take money from you. Transaction fees, balance transfers, cash advances, late payments or making payments by phone etc. are the common charges. If you intend to increase your credit limit, you have to pay some fee and if you go over the credit limit, then also there are penalty charges.
To save the fee or penalty charges, take the cards with reasonable fee or zero percent interest rates especially if you are not a regular card user. To get rewards program, you don’t have to pay extra fees.
Eric Tyson, author of personal finance suggests understanding all the rules and regulations before accepting a credit card to prevent horrendous situations. Never go for the card having huge fees even if the benefits are outstanding.
Balance computation method: The daily balance is added together which is then divided by the number of days in the billing cycle to calculate the finance charge. Some credit cards use two billing cycles to compute finance charge which costs you a lot of money in financing fees so stay away from such cards.
Incentives: Incentives are attractive no doubt, but they should be beneficial also. The card issuers in order to tempt you to use the credit cards give rewards programs and don’t charge for that. Always take a credit card that has flexible options of redeeming the reward points in the form of cash or travel. It’s also suggested looking for the restrictions of rewards programs before taking a card. The number of points on your purchases should be good and whether they expire or not must be carefully looked upon.
Finding the best credit card is not possible until you know the different kinds of cards. Since every person has different needs, the credit cards are different so there is no single best card in Sri Lanka. Instead, you should learn about these below mentioned factors to find the right card for you.
Every credit card has its own benefits for different people. Depending on your spending habits, there are a number of credit cards available. Also, it is important to know your pattern of making credit card bill payments to find the best card. So before you take a credit card, here are few features to consider:
- Cash back: With each purchase, you will get cash back in your account so choosing a card having cash back option will benefit you in the longer run.
- Interest rates: Interest rates vary from card to card so it is essential to check this factor not to get trapped in huge interest rates at the end of your billing cycle.
- Discounts: The card issuer provides discounts and offers to the cardholders if they make purchases through their partners or tie-up organizations.
- Reward schemes: Reward points keep on adding whenever you use your credit card to make purchases and benefit you at particular vendors. You can redeem these points later on so choose credit cards with rewards programs which suits your requirements and spending habits.
- Card Fees and Charges: Before you choose any credit card, make sure to check all the charges like credit card limit exceed fee, annual fee, reward point fee, international transaction fee, and cash advance fee to save your extra expense.
- Payments: Maintaining a proper amount in a month is important so take a look at the minimum repayment value to avoid interest rate charges.
Apart from knowing the benefits which you will get as a credit cardholder, other factors are also there to consider. While the basic features, application process and document requirements are must, you cannot miss out on other sections also. Here are few more things to consider when taking a credit card:
You must take into consideration the following while applying for a credit card:
- Check your credit score: By checking your credit score with the bank, you are eligible to get a credit card that offers better benefits. If your score is low, you can get a secured credit card by getting an approval.
- You must check which type of credit card will suit your need: To choose the type of credit card you need, it is important to check your expense list. If you are a shopping person, a credit card that offers reward points is good for you. If you are a person who likes dining out with friends or family, a dining credit card is your type of card.
- Read through the terms and conditions: Before taking a credit card, it is suggested to check the rules, terms and conditions etc. Also, the interest rate charged on your credit card must be known if you don’t want to pay huge charges on payment delays. Keep a check on the installment payment plans and balance transfers from the credit card.
- Look out for specific features: If you get a card from the issuer that allows you to increase the credit limit automatically without charging any fee, it would be best. Ask the company if it offers extra benefits at minimal prices.
- Compare the card with other banks credit card: Never rush into taking a credit card, rather compare few cards from different banks or institutions. Compare the rewards and cash back you can earn and whichever gives you the best, go for that. Plus, it is important to check whether you are investing in a good credit card to avail the reward point program.
- Effective Interest Rate (EIR): Banks always advertise annual percentage rates (APR) to its customers. However, the effective interest rate represents the true economic cost of carrying a credit card. A credit card is one of the financing options that come with the highest costs. With EIRs at 28% per annum in Sri Lanka, it is important to find out the EIR of the credit card offered by banks which will be the interest rate charged to your outstanding credit card balance.
- Annual fee: Banks do charge an annual fee to credit card holders which can be as high as LKR5000 per annum. Before applying for a new card, you should understand your financing situation and see if there is another similar credit card offering a lower fee, or better yet, zero promotional annual fees. The range of annual fee for credit cards in Sri Lanka is between LKR1000 to LKR6000.
- Other charges: Always read the fine print to discover if there are any additional charges that could be imposed by the bank such as a foreign transaction fee, dynamic currency conversion, cash advance fee, balance transfer fee, and late payment fee.
- Minimum income requirement: Before approving your credit card application, banks will need to know your income level. Minimum annual income requirement in Sri Lanka for a basic credit card is LKR15,000, in general. Be sure to check if you meet the minimum income requirement before applying for your credit card.
- Credit Score: You need to make sure your credit score is at a healthy level. Generally, you can check your credit score through The Credit Information Bureau of Sri Lanka or any commercial bank.
- Cashback Benefit: Credit cards that come with cashback features would require you to comply with several terms and conditions. First, you need to spend a minimum amount every month in order to be eligible for the maximum cashback rate offered by the banks. Next, you need to look at the maximum cap of cashback (rates) as some banks may impose this to certain credit cards. Then, you should carefully look at the categories of spending that are entitled to cashback features.
- Reward Points Benefit: Just like cashback credit cards, there are different tiers for the amount of rewards points that you can earn based on the spending category.
Having a credit card seems attractive but before applying, there are few things to consider with open eyes. If you are a responsible person, it is good as you can enjoy buy-now-pay-later concept and also earn rewards and cashback. But if you have the habit of forgetting things, credit card can land you in a big problem. Improper management of the card causes you to pay huge interest charges and you end up with bigger debts later on.
The Pros
- Speed and Efficiency: A credit card is really easy to carry along as you can keep it in your wallet while on the go. Since it is a small plastic card, you don’t have to worry about the safety feature as no one can know that you are carrying it. Huge amount of paper money can cause a problem as you cannot carry it in public transportation but using a credit card is actually easy. While shopping, all you need is to swipe the card and make the payment by entering the PIN number or signature to complete the transaction.
- Protection: If you want to avail the real benefits of a credit card, you should choose purchase protection plan to get coverage against any theft or damage. The card issuers offer this protection to make sure that if in any case the card gets lost, you get a replacement as per the policies.
- Buy-now-pay-later: As talked earlier, this concept is pretty amazing as you can buy anything at any time you want if you are short of liquid cash. For times when you don’t want to give away all the money in one instance, the credit card helps in making monthly installments through which you can pay in short amounts. This is called easy payment plan which some issuers offer at 0% interest over a specific duration. As you don’t have to pay any interest to use the money, it is a good feature for salaried persons who cannot afford to buy expensive things. If you fail to pay back the money within the specified duration, you will have to pay the price as well as some interest at the end of every month.
- Earn benefits while you spend: Buying things with cash doesn’t entitle you to any extra benefits or rewards but with credit card, you get rewards every time you buy something. Taking a card with added perks is good as you get cashback, rewards and travel etc. These benefits are applicable if you are a responsible credit card user or else the reward points get cancelled each month with the interest charged on the unpaid balance.
- Emergency aid: Paying money in emergency is possible with credit card as and when there is not ATM machine near you to withdraw funds. It provides complete security buy helping you pay the money with a single swipe and then you can pay back the money later on. When suddenly you are out of cash or debit card gets stuck, credit card comes as a life saver.
- Good for your credit score: Paying bills on time and using the card responsibly earns you good credit score in the bank or financial institution.
The Cons
- The debt trap: To avoid debt trap, you should always pay off more than the minimum amount or if possible, the entire amount. It is very common to forget that you are actually using credit card and not the debit card for which payment is being deducted from your bank account. In the case of credit card, you have to pay back the used money always and failing to do so months on months make you fall into a nasty debt cycle which is then hard to recover. Of course, a credit card is easy to use but it has severe bad effects like huge interest charges if you lose track of your expenses.
- Hidden charges and fees: To take a credit card, make sure to ask the issuer about hidden charges and fees if any. Other than annual charges and interest fee, the credit card has some creepy charges as well that come up once you start using the card. All these hidden charges appear in the monthly statements that includes penalties and late payment fee etc. So read the terms and conditions carefully before jumping on to grab a credit card.
- Expensive cash advance: Never ever think of using the card to withdraw money from ATM as the interest rate is nearly around 28% if you do so. It should be kept as the last option when things go out of control and there is no way out other than withdrawing cash in emergencies.
- Can be bad for your credit score: Fail to make timely payments pull you in a bad condition where it can ruin your credit score. So make sure to pay the minimum amount every month to get saved from the debt trap.
- Fraud and scams: Frauds can happen if you own a credit card. As in the case of cash, you are always prone to thefts or robberies, same is the case with credit card. The only difference is that the credit cards are susceptible to digital frauds or scams where a person can access your card if he or she knows the PIN number. You may find a fraudulent activity on your statement or can give away the information to an unknown person on phone claiming to be the card issuer. Stay away from such random calls and never provide any information about your credit card. If it happens, contact your card provider immediately and follow necessary measures.
Despite the fact, credit cards can be an effective alternative for cash along with all the benefits and features, there are some downsides that might turn you off as follows.
- Temptation to spend more than you can afford. Credit cards open up extra purchasing power and give you the illusion that you have more money than you really do. Always ensure you don’t spend more than what you can actually afford.
- They reduce your future income. Each time you use a credit card–or any form of debt–you’re borrowing from money that you haven’t earned. A portion of your future income has to go toward repaying your credit card balance if you want to protect your credit.
- The terms can be confusing. A person who’s not used to reading credit card agreements can easily be confused by the phrasing and the jargon.
- Fees and interest can be expensive. Depending on the credit card and how you use it, your credit can cost thousands of rupees over the course of a year.
- Potential for credit card fraud. Just having a credit card puts you at risk of credit card fraud. Thieves don’t have to steal your credit card to get your information. They can hack the store where you shop or websites that you’ve used your credit card to steal your card details and use it to make fraudulent purchases.
- Potential for debt. You create debt each time you use your credit card. You can keep the debt from growing by paying off your balance each month, but if you only pay the minimum and keep making purchases, your debt will grow.
- Misuse can ruin your credit score. Your credit score is tied directly to how you use your credit card. If you run up big balances and pay your credit card late, your credit score will be impacted.
You must be responsible with your credit card. You must have strict finance discipline when you are using a credit card so that it will not result in an excessive debt. You must be aware of the following:
Do’s:
- Always make your payments on time. When you are carrying over the balance to the next month, you will be charged an interest. Since you can carry forward the balance each month, your interest will keep increasing.
- Try to limit the use of credit card and make it a point to not go over the limit
- You must read your monthly statement thoroughly. This has to be done because; it helps you spot any unnatural transactions.
- You must use a credit card only when you require. You can use your savings to buy high value items. If you don’t have the funds to repay the purchase, don’t swipe your credit card, instead collect the funds and then make the purchase. If you really want a high value item and you wish to pay with your credit card, you can either wait for a few days to see if you still want it immediately, or you can convert the purchase to an o% interest installment plan.
Dont’s:
- Avoid withdrawing cash from your credit card as the interest charged on cash advances are higher. You will be charged interest from the day you withdraw cash and you don’t get any grace period on the same.
- Don’t get too many credit cards. You may end up forgetting to make the payments on certain cards and this, in turn, will reduce your credit score. If you already have too many credit cards, you must consider consolidating them. You can transfer the balance from your credit cards to one credit card and clear out the transferred balance in 6 – 12 months. This will help you from getting into a huge debt and you would’ve cleared out the balance from more than one credit card.
