You will often hear people saying that all debt is bad debt and that all forms of credit should be avoided if you can. In principle, that is true. However, credit cards are the one form of debt that can be useful if managed carefully.
So how do you manage credit cards effectively? What do you need to watch out for? Today, we give you a set of guardrails that allow you to maximise the value you get from credit cards while staying on the safe side of debt management.
Why should I use credit cards at all?
Credit cards are a handy payment method, which is safer than cash and can come with additional benefits like cashback or travel points:
The safety comes from the āpurchase protectionā, effectively providing you with a level of insurance on your purchases. Should any disputes arise, you can raise a claim and often get your money back from your card company.
The benefits arise from using the right card for the right purchases - one that offers cashback, travel points or advantageous FX conversions for when you are spending abroad.
As long as you observe the rules below, there really isn't a reason why you should not pay for things on credit card.
Our rules for safe & sound credit card usage
ALWAYS pay in full, every month - Every month you should pay your credit card bill in full to avoid interest charges. UAE credit card interest is usually in excess of 35-40% per annum so that will accumulate quickly.
Have the right card mix - As we covered in a previous newsletter, different credit cards offer different benefits. One might be better for cashback, others for travel points and some for foreign spending. Make sure your credit cards fit your lifestyle and have 2-3 on hand that you use for different purposes to maximise your benefits.
Utilise supplementary cards for your family - The majority of credit cards offer one or two free supplementary cards. Any spend on them also accumulates the benefits of the primary card. Remember, you are solely responsible for paying off the spend on supplementary cards so make sure you trust the family member to spend wisely :)
Maintain the right credit utilisation - A credit utilisation of 30-40% of your (combined) credit limit is best for your credit score as it demonstrates good money management to future lenders. Try to stay within that bracket, though it's okay to exceed that from time to time.
Set transaction limits - A lot banks will allow you to set transaction limits for each of the cards. They can be quickly adjusted should you need to, but keeping them limits your exposure should your card be used in an unauthorised transaction.
6 DON'Ts when using credit cards
Miss a payment - Missing a payment will have a big detrimental impact on your credit score so avoid this at all cost. If you're struggling one month, ask the bank to only make the minimum payment but do catch up as soon as you can to avoid hefty interest charges.
Buy anything you can't afford - A good rule is to always have the cash in your account before making credit card purchases. That way, you make sure you will always be able to pay the card off in full every month. Remember, a credit card should be a payment method only, not a credit line.
Take cash out on credit card - Taking out cash against from an ATM and paying for cash transactions online (for example for an FX transfer) counts as a "cash advance". A cash advance will attract a ca. 3% transaction fee with a minimum of ca. AED 100, so it's a very expensive method of obtaining cash that you shouldn't use.
Pay unnecessary annual fees - A lot of benefit cards come with an annual fee, which is sometimes waived in year 1. Make sure you set calendar reminders for yourself ahead of renewals and re-evaluate your position.. Is the card still providing you with sufficient benefits to justify the fee? Are there better products available in the market? If so, ditch and switch.
Fall for hidden FX charges traps - Whilst all cards allow you to spend abroad, be mindful of FX charges that come with that. The FX charge is a combination of the network provider (VISA, Mastercard - usually around 1.15%) and your bank's charge (ca. 2-3.5%). The best cards for foreign spend drop the bank's charge but always keep the network fee.
Share your OTP - We can't stress this enough. Too many people have lost money by handing out their OTP to people pretending to be the police, your bank or similar. An OTP is only for you and the transaction you are authorising. No one else.
Enjoy safely
Credit cards are a great tool that can enhance your financial wellbeing by providing additional protection and benefits on your day-to-day spend. As long as you simply use them as a payment only method, always have the cash to cover your purchases and display the right discipline, you will reap the benefits.
Disclaimer: Please bear in mind that this email does not constitute financial advice. Any choices you make you are solely responsible for. We always aim to provide highest quality, independent views but do your own research to ensure youāre comfortable with any changes you make to your personal finances.