Credit Card Sins You Should Never Commit
Whether it is ignorance or carelessness, most of us commit cardinal credit card sins once in a while. Today, I highlight 4 of them that should be avoided at all costs. In fact, if you are in the habit of doing any of the following things, I’d recommend you get rid of your credit card, because the mistakes make your credit card too expensive, and suggest you probably don’t have the discipline it takes to have a credit card.
1. Paying your bills late
All credit card bills have a defined due date, and steep penalties if you fail to pay by this date, no matter how small your credit card bill is. I once paid a Kshs 500 fine for a Kshs 6 balance! Sometimes the credit card statement could delay in the post, I recommend that you call the credit card company to ascertain your card balance, and pay it well before the due date.
It is also important to be careful about mode of payment you use, some banks take a couple of days to recognise a bill paid by cheque, and for that reason you could pay your card too close to the deadline and end up having to pay a penalty because the cheque hadn’t cleared on the bank’s side. To be on the safe side, pay your credit card bill one week in advance.
2. Making minimum payments
Most credit card companies will entice clients by recommending a minimum bill payment that is significantly less than the total amount due. Typically, this is 5% of the total bill, to a minimum of Kshs 1,000. While paying the minimum will leave you with more cash in your pocket today, it is a terribly costly strategy. Today, most credit cards charge a flat interest rate of 3.5% on the credit card balance per month. The reason they want you to pay the minimum amount is because then, they are able to make money from you, as opposed to if you paid of your total balance, in which case they wouldn’t charge you an interest fee.
For example, if you have Kshs 50,000 outstanding, the bank will recommend that you pay Kshs 5,175 for the first month, Kshs 4,821 for the second and so on. If you keep making minimum payments for one year, you will have incurred Kshs 21,339 in interest fees! To make matters worse, it will take you 24 months to pay up fully, if you keep paying the minimum.
3. Taking cash advances
A couple of months back, my credit card company had a “very good offer”, you could take “loans” right from your ATM card, at “no charge”, they were calling clients every other day to market the offer. While this may sound tempting around the 15th of the month, NEVER take cash advances on your credit card. The interest costs are astronomical: 6.5% on withdrawal, and a daily interest rate of 3.5%.
To put this into perspective, let’s assume you borrow Kshs 50,000 for 15 days (till the next pay date), you will incur Kshs 28,803 on interest fees, in 15 days! In this case, swipping the card is much cheaper!
4. Spending to earn rewards
I would want to believe no one does this, but people do! Credit card companies promise certain free rewards if you use your credit cards. Spending to earn a reward is a silly idea, because these rewards are not free. To earn rewards, you need to spend money, and the promise of rewards can lead you to spend more than you otherwise would — and perhaps more than you can afford. These rewards will never offset interest costs.
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