Tag: financial health

Terrible Credit Card Mistakes First-time Users Easily Make

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Credit cards allow users to pay for items or services in lieu of cash. However, a person should be responsible enough to understand that the card must not be considered free cash.

That is why, for some people,  without proper guidance, it is easy to end up in serious debt within a short span of time.

Here are six of the most common mistakes first-time credit card owners make when using their cards and what can be done to avoid them.

1.Believing credit isn’t important

In the real world, having good credit is vital. Credit scores allow an individual to apply for mortgages and save up on car insurance premiums.

Without excellent credit scores, you won’t have access to lower interest rates or premium credit card rewards. Even potential employers and the landlord of your future apartment might check up on your credit score to see your ability to pay your debts.

By managing your credit responsibly, future credit card and loan applications are approved more easily and you can gain access to better offers. You can also use your good standing to negotiate better interest rates on loans. Even credit cards with a limit of $5000 can help build your credit score.

So apply for a credit card early, but make sure to use it wisely.

2.Spending too much

Credit cards offer users the opportunity to buy or pay for products or services that may currently be out of financial reach. However, if you’re not aware of where your money goes and how much you spend on a monthly basis, you could quickly max out your cards and end up in crippling debt.

Live below your means. This is true regardless of whether you are still currently relying on your parents for financial support or working multiple jobs.

Create a budget to get an idea of your financial state. Make a list of your sources of income and your monthly expenses. There are apps that can make recording this information easier, although simple spreadsheets can work just as well.

Write a goal to motivate yourself to save, then create a financial plan for achieving your objective. It could be as simple as skipping Starbucks for a year or avoiding mall sales.

3.Paying only the minimum amount

If you have any outstanding payments on your credit card, do your best to pay these off as quickly as possible. Compound interest can easily bloat your small debt if you are not careful.

Say, you paid AED5,000 for a used car and paid for the purchase using your credit card. With an annual interest rate of 15 percent making the minimum payment AED150, it will take 173 months or more than 14 years to pay it off. At the end of this period, you would have paid over AED8,300 on interest rates alone.

That is more than your original debt if you think about it, so make an effort to eliminate your credit card debt as quickly as you can.

4.Missing payments

Not paying on time can be devastating to your credit score. It stays on your record for at least five years.

As much as possible, avoid buying anything that you cannot afford to pay in cash. By doing so, you avoid going over your budget and getting into credit card debt.

Find a way to make paying off your credit card debt automatic if you are the type who forgets. Perhaps you can open a bank account that automatically debits a certain amount to pay off your debt. This way, you won’t have to worry about forgetting your payments.

6.Lending your credit card

For some, having a credit card gives the holder a license to spend to its limits. You may be responsible with using your credit card, but you can’t say the same thing about your friend, girlfriend, boyfriend or significant other.

Treat your credit card as you would your bank account PIN: always keep it secured to yourself. Never let anybody else use it to avoid souring your relationship and ending up in bad debt.

Remember these common errors so you can avoid getting into trouble with your credit card company.

Smart Money Moves for a Financially Healthy 2020

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Planning to set your financial goals right at the beginning of the year is a great way to start in 2020.

Review your financial position, check where your money goes, review your debt, cut down on extra expenses and plan efficiently. This will help you stay on savings course and prevents you from getting into any money hurdles.

Here are a few ways to help you do that:

1: Revisit your mortgage loans.

Home loans are one of the biggest financial responsibilities that require regular revisits. Look for better options to save your money or get other benefits when there is a change in your financial situations, bank’s loan terms or interest rates.

Check if refinancing can help you save money. Compare your loan interest rates with the current rates because even half of a percentage point drop will give you substantial savings.

Lower interest rates help in reducing your mortgage term because here you can raise your monthly payments and prepare to clear the loan early. For example, paying off the loan in 10 years instead of 20 years offers great savings incentive to the homebuyer.

2.  Get a personal loan

A personal loan is a viable money-saving solution in many situations when you borrow it for the right reasons. With personal loans, you can settle higher interest loans, create a good credit score, pay off credit cards or consolidate debts with more manageable fixed EMIs.

For instance, when you want to consolidate debts on your different credit cards, taking a personal loan can help pay off all the charges in one monthly payment. You benefit from lower loan interest rate compared to the annual percentage rates (APRs) on your credit cards.

However, before taking a loan, calculate your repayment capacity using an online app, select repayment tenure that is within your reach and carefully review all the fine print.

3.  Select the right credit card

A properly selected card can help you make savings on purchases, but the choice of the card should be based on your use and habits.

For instance, a frequent traveler will make savings when his card offers discounts and rewards on air tickets, hotels or lounge access.

The choice of the card also depends on whether you carry a balance each month or pay off dues before time. When you take forward a balance on credit, select a card that has a low annual percentage rate (APR).

Knowing your credit scores always helps you to apply for a card that is more likely to get approved. Lastly, compare the annual savings you make on the card against the card’s annual fee to see if it is right for you.

4. Find a balance transfer scheme

A balance transfer can help you make substantial money savings. Transferring high-interest debt from credit cards or loan to a card with a lower interest rate gives saving on interest and helps in clearing off the debt faster.

However, check if any balance transfer fee is levied to carry the balance to your new card. Another critical factor is the new card APR rate; check the introductory APR offer and price after the promotional period ends.

Always evaluate the terms carefully and put a debt repayment plan in place. Remember your debt doesn’t disappear when you do a balance transfer, but effective planning can help make good money savings.

5. Work out your monthly budget

Make a note of your cash flows to curb all unnecessary spending. Different apps come as a handy tool to do all the calculations for you.

Feed-in your monthly income and your expenses and the app will give you a clear picture of how to plan yourself well.

These tools help you consolidate all your bills, track the spending pattern and get an alert message when the due date of any statement is nearby to avoid late fees. Money management is a vital step to rein spending and get finances under control.

6. Review your subscriptions

If you are a Netflix and Amazon Prime addict, ask yourself if you need all these subscriptions and if you have the time to watch them?

Most people pay more on subscribing too many services but hardly use that entertainment and reading channels they have.

It’s the time to evaluate the spare time you have at hand to use these services and the cost you are spending monthly on subscribing to these. This helps you track the service you can do without and make money savings.

Besides entertainment, your current telephone and mobile plan also needs to be reviewed. Check your bills to study your usage patterns. If you are not using the full service, try considering another package. And if you are paying extra after the service amount, see if you can sign up to a new scheme that serves best to your needs.

 

Transactor vs revolver – What’s Your Approach with Using Credit Cards?

Transactor or a Revolver – What’s Your Approach with Using Credit Cards?

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Plastic money is a popular and convenient way to pay for purchases. Credits cards and debits cards are often referred to as plastic money. Most people prefer them as they make transactions more convenient.

So whether you are purchasing a ticket to travel, shopping for groceries and everyday essentials, buying gadgets, clothing or other luxury treats, paying via a credit card is typically the first choice for most consumers. You can also order food, make purchases online, and book different transport needs effortlessly by using your preferred plastic card, thereby saving you a lot of time and energy.

If you are careful with your transactions, the use of a credit card makes your life hassle-free. However, if you make impulsive purchases beyond your means, using plastic money irresponsibly can put you into a vicious debt cycle.

So, what’s your style of using your credit card?

Do you use a credit card only for convenience? This means you never pay interest on the card and instead prefer to pay all dues on time. If that’s your approach, then the industry sees you as a “transactor” – a person who uses credit cards to make transactions easier and does not really utilize the “credit” facility offered by the card fully. Transactors enjoy benefits by accumulating points, miles and other rewards on their card transactions and hence effectively enjoy a “discount” on their purchases.

On the other side of the spectrum, many people use credit cards to make purchases without having enough funds to pay for them in full by the due date. Such users are known in industry parlance as “revolvers” as they “revolve” their balance outstanding across multiple billing statements.  “Revolvers” use credit cards to furnish today’s needs via tomorrow’s income. However, revolving your credit card balance can cost a lot of money in the form of interest, and this type of spending habits can severely strain your personal finances.

When does a revolving habit become risky for your financial life?

Banks typically give consumers a grace period of 21 to 30 days – the period between the end of the billing cycle and the payment due date. When you pay the outstanding amount in full before the due date, you won’t have to pay any interest.

For those who struggle to find the funds to clear their credit card balance each month, it’s easy to enter into a vicious cycle of debt.

When the payment is made after the due date, i.e. when you  “revolve” a balance, interest is calculated on an average daily balance method from the date you made the purchase.

If you continue to revolve a balance, there will be no grace period. You accrue daily interest on your balance outstanding and new purchases. So, your statement will then show substantial interest each month. In such a scenario, everything you purchase automatically becomes 30-40 per cent more expensive (depending on your particular card’s interest rate). This is a lousy buying strategy.

Moreover, for Personal loan seekers, this revolving balance can act as a disadvantage. It impacts your debt-to-income ratio (DTI) adversely, which in turn affects the credit score.

Revolvers that tend to accrue interest daily will have higher utilization rates and DTI ratios. The utilization rate and the percentage of the available credit you’re using are vital elements in determining a credit score.

For example, if your statement balance says Dh1,000, your credit report will indicate that you have a debt of Dh 1,000 that month. Now, if your credit card has a Dh1,000 credit limit, then the utilization rate here will be 100 per cent, even when you pay the bill in full.

So, here, to lower your utilization rate, you need to limit your purchases for the month or make payments early.

Whether you use the card and make payments as a revolver or transactor is not essential here. What you need to keep in mind is that for a better utilization rate, you must bring the total balance as low as possible and pay the remainder of the bill on time.

A higher DTI results in you paying extra money as extra interest charges in the long run (as these could impact your other loan interest rates in the future). Hence, a low DTI is vital for securing more favourable terms on a new loan or line of credit. It is also recommended you pay off all existing debts before submitting such a loan application.

The revolving habit overall imposes a high risk on your saving strategy and financial health. However, if you are revolving the balance at the time of an emergency, then carrying a balance for several months on a credit card is a better option to other even more expensive financing methods.

Even for other mindful larger purchases made with a credit card that is backed with a good plan to pay off the debt, it can be a wise decision. Remember, credit card companies will always prefer having revolvers because interest charged equals higher income for them. But, if you are looking for a robust financial situation, aim to be a transactor and always pay your credit card balance in full each month.