How to Use a Credit Card Wisely

Whether it’s for day-to-day spending or for big purchases, there are now a lot of payment methods available that we can choose from. And it’s a given that each of these has its own advantages and risks, depending on how we use them.

In this article, we’ll focus on credit cards—a payment method that can easily accumulate debt and damage credit scores when misused. We’ll discuss the 5 practices you can follow to leverage it and ensure that it’s used responsibly in your financial journey.

Let’s go to our first practice, which is...

1. Use your credit card like cash.

Yes, you read that right. Buy only what you can afford and have the budget for already.

One misconception when it comes to credit cards is that it’s often used to make something affordable and to have the option to pay in installments. For example, you’ve been eyeing a phone priced at PHP 78,000. Currently, you only have PHP 45,000 in savings for it. But the store accepts a 12-month installment of PHP 6,500 a month plus interest. The usual thinking is that you can already buy the phone since, in that 1 year timeframe, you can already earn the missing PHP 33,000. But this shouldn’t be the case. Just because you can use your credit card for installments doesn’t mean you should get the phone now. After all, you don't yet have the money to pay for it in full.

Adopt the mindset that every purchase should be within your means to pay off immediately. A credit card is not a source of additional funds. Instead, it should be used simply for convenience so you don’t need to carry a large amount of cash. This way, you can manage your finances better and avoid spending more than you can afford.

With this said, here’s the next practice.

2. Always pay for your credit card in full.

Since we established to treat your credit card as cash, you should already have the money to settle the full amount of your bill before its due date. Because if you only pay the minimum balance every time, you may end up spending 50% more to repay the same debt. This is because credit cards can charge a 2% to 5% interest rate per month on your balance. While this may seem small, it snowballs to a large amount when allowed to build up.

Let’s say you spend PHP 20,000 on an item and you only pay the minimum, which in our example is PHP 1,000.

What would happen is that you’re technically borrowing PHP 19,000. And if the interest rate is at 3%, then next month, you owe PHP 19,000 plus PHP 570. Now, your balance is PHP 19,570.

In the second month, you only paid the minimum again, which is PHP 1,000.

Subtracting this from your previous balance, the updated balance is now PHP 18,570. Adding the 3% interest, which is PHP 557, will result in a new balance of PHP 19,127.

And when you continue paying the minimum amount of PHP 1,000 every time, it’ll actually take you 30 months before you fully pay your balance.

On top of that, you’ve paid almost PHP 10,000 in interest charges, which is about 50% of the original amount of PHP 20,000. And take note that this is just at a 3% interest rate.

To illustrate,

• Item cost: PHP 20,000
  Minimum amount paid every month: PHP 1,000
• 1st month balance: PHP 19,000
  Interest on balance at 3%: PHP 19,000 x 3% = PHP 570
  Total due: PHP 19,000 + PHP 570 = PHP 19,570
• 2nd month balance: PHP 19,570 - PHP 1,000 = PHP 18,570
  Interest on balance at 3%: PHP 18,570 x 3% = PHP 557
  Total due: PHP 18,570 + PHP 557 = PHP 18,127
  .
  .
  .
• 29th month balance: PHP 1,540 - PHP 1,000 = PHP 540
  Interest on balance at 3%: PHP 540 x 3% = PHP 16
  Total due: PHP 540 + PHP 16 = PHP 556
• 30th month balance: PHP 556 - PHP 556 = PHP 0

This just shows that when not managed properly, credit card balances can cost you a large amount of money. Don’t let yourself fall into the trap of accumulating debt and interest charges.

3. Never pay for credit card annual fees.

There are now plenty of credit card options available that don't charge annual fees and still offer competitive rewards and features. But if you already have a credit card with an annual fee, don't hesitate to contact your card issuer and have it waived. You can just simply say, “Hi, please waive the annual fee on my credit card. If it’s not possible, please cancel my credit card then.” And the banks will waive this fee most of the time, especially if you have a strong payment history by always paying in full.

If you’re wondering why they’ll do this, there are two big reasons.

1. The credit card industry is extremely competitive.
   Because of this, the banks want you to use their cards rather than any other cards. And in order to retain you as a client, they will gladly waive the annual costs.
2. Every credit card transaction you make already generates revenue for banks.
   Transaction fees are already charged to the merchant. And the credit card, like Visa or Mastercard, and the issuing bank will already get their cut from it. As customers, we no longer notice these transaction fees, but they exist. This is why they’ll grant your request to waive the annual fee.

Now, in case the bank won’t grant your request to waive the annual fee, just ask them about the process of canceling the credit card. Since this gives the impression that you’re serious about it, it’s likely that they’ll waive the fee instead.

In this situation, it helps if you have more than one credit card, as this gives you bargaining power and other options. But if you have credit card debts, then this won’t matter. Because it shows that you need them more than they need you. That’s why it’s important to pay your balance in full. Because this will show that you’re in a good financial state, which will make them waive the annual cost of your credit card.

4. Pay in advance if you want to go over the credit limit.

Some credit cards will just cancel your transaction if you don’t have any balance remaining. But there are some that will let you exceed your credit limit. And this is what you should avoid.

If you already know that you’ll be spending more than your credit limit, pay for it in advance. For instance, your credit card’s limit is at PHP 100,000, but you know that you need PHP 200,000 during an international trip. What you should do is pay in advance a sum of PHP 200,000 on your credit card. By doing this, you’ll increase your credit limit to the amount you need.

This approach will help you ensure smooth transactions, avoid fees from exceeding the limit, and plan your spending ahead of time.

And the last practice you should keep in mind is…

5. Treat the rewards as just rewards.

While credit card rewards can be enticing, it’s important to remember that they’re just that—rewards. It’s not an excuse to overspend or a reason to keep using your credit card.

Don’t aim to reach a certain amount spent just to receive a reward. Don’t focus on it at all. Only make purchases that are aligned with your goals and within your budget. Treat the rewards as a bonus for your responsible spending habits.

Remember that if you exceed your limit, interest fees and other penalties may quickly offset the value of the rewards. So maintain a disciplined approach and prioritize financial responsibility. You can make the most of credit card rewards without compromising your well-being.

And that’s it for the 5 practices you can follow when it comes to using a credit card. I hope that this will guide you in using it wisely.

Don’t forget that maintaining financial stability and reaching your long-term goals can depend on using credit cards responsibly. By incorporating these practices into your habits, you can ensure that your money is working for you rather than against you. Get the convenience of having a credit card without having to worry about the risk of being buried in debt.

So, stay mindful of your spending, prioritize timely payments, and always strive to make informed financial decisions.