Breaking The Credit Card Habits That Are Keeping You Broke
by Inside Manila Contributor, September 16, 2019 9:53pm
Art by Dani Elevazo
Credit cards offer a thrill. With just one swipe, you can get almost anything within your credit limit.
On the other hand, a credit card offers convenience. It’s a cash alternative you can use for emergencies. Owning one is also an excellent way to keep track of your purchases.
But get carried away with your spending, and you could end up with an overwhelming credit card bill, along with anxiety-inducing notices from the bank.
Having a healthy relationship with your credit card is key to reaping or maximizing the benefits of owning one. It may take a lot of self-discipline, but it can be as simple as understanding the different credit card fees and how they work. Break these bad credit card habits to make your credit card life stress-free.
Not paying your full credit card balance each month
Penalty: Finance charge
What it is: Fee for when you don’t pay off your credit card balance. This penalty usually amounts to 3% interest from your monthly balance. The longer you take to pay off your balance, the higher the finance charge.
Here’s an example of how your debt can accumulate based on a 3.5% interest rate per month (Source: imoney.ph)
Remaining amount plus interest
P 6,000 x 3.5% = P 6,210
P 3,210 x 3.5% = P 3,322.35
P 322.35 x 3.5% = P 333.63
The additional charge of 333.63 php on top of the original amount of 1,000 php may sound small, but imagine how big the charges can get after several months.
To avoid finance charges, pay the full amount of your credit card balance each month. In this way, you get to keep your finance charge at 0.
Not paying your credit card balance on time
Penalty: Late payment fee
What it is: A penalty when you don’t settle the minimum payment within the due date. This fee is charged on top of the finance fee (explained above). Penalty fees range from P 300 to P 750 (or 2.25% to 8% of the total balance)
When you pay your credit card bill late, your credit score may drop. (A credit score is a number that evaluates how financially trustworthy you are.) This score affects a lender’s decision to offer you a loan when you need to buy a house, a car, or to start a business. Payment history makes up a big portion of your credit score,and late payments can have a significant effect on your score.
You can find lots of bill reminder apps that will help you make sure to pay your bills on time.
Spending more than 30% of your credit limit
Possible penalty: Fee for going over your credit limit
What it is: 500 php to 1,500 php fee for each month that you go over your credit limit
Your credit utilization—or the amount you spend with your credit card compared to the credit limit—plays a significant role in your credit score. To build and maintain a good credit score, you have to keep your monthly credit card spendings below 30% of your credit limit. So if your credit limit is 20,000 php, you should only spend less than 6,000 php per month.
Keeping a low credit card balance shows that you are not spending too much of your income on paying your debts—earning you a high credit score. You'll need it when you apply for a loan in the future.
Not sure if you’re ready to get a credit card? Make the right choice by knowing what to expect when you get a credit card. And when you’ve made the decision, develop good habits to stay out of credit card debt.
Being debt-free is an empowering feeling. It’s also a reflection of high financial intelligence. By being free from debt, you get to focus on enjoying the present and building your future.
*Edits have been made by Inside Manila Editors