Revealed: 5 credit card secrets

Credit cards are no angel or devil. Spending habits and personal finance management make it what it appears to be. Let there be no illusion, think real, be wise, cautions Rajiv Raj

They have a friendly appearance and seem like helpful, kind angels in our life. Yes, I am talking about the credit card. And if you are nodding in agreement to that description, then hold on! There is more to it than what meets the eye.

Credit cards have a harsh but real side. Which when revealed can push one in a debt trap giving you a feeling that you are sinking in quicksand. On the other side, one cannot deny the benefits credit cards have to offer. Bear no confusion or fear in your mind. You just need to know the basics, which is really the secret to using credit cards effectively.

1. The card has a mind of its own

Most credit cards come laced with fancy offers. Discounts, perks, rewards and numerous other spending baits. It's almost like the card knows where it is has to be swiped. But hold on! It's your money and your decision. Don't let the card company take the wheel and steer your car to the place they have chosen, to spend on things they want you to! Outsmart the card, spend smart.

2. Limit the number of cards

Credit card companies silently encourage you to sign up for credit cards by being persistent. Throw in offers which prima facie appear tempting and we start thinking, there is nothing to lose so why not!

That little voice of resistance inside is silenced when they add that there is no annual fee applicable. Now this not just another card sitting pretty in your wallet!

It is debt you are willing to take on. Definitely not worth it when not required. One or two credit cards are all you need to have.

3. Nobody will tell you this, except the statement

Fine print information, fees, charges etc., cost real money. This information is scattered and hence often ignored. Before signing up for a credit card, it is important to know the rate charged and other applicable charges to run an effective comparison and pick the one that suits you best.

Also, study the monthly statement in detail. Any charge, the header of which you do not understand or which was not discussed before, must be questioned. Awareness is the key.

4. The discipline of clearing monthly dues

Credit card is debt. So every time the card is swiped, the meter starts ticking and stops when the balance is cleared. As long as we bear this in mind and clear our monthly dues diligently, all will be well in our world.

The trouble begins when the payment is missed.

Interest rates on credit cards are exorbitant and it is best to steer clear off that zone. Also, cards offer the facility of clearing a minimum monthly balance. Though it may seem convenient to walk down that road, do not forget that the ticking meter is calculating interest on the balance amount, every single day.

5. The money is real

The feeling that one gets every time we make a payment in cash is different than swiping that card. Spending cash hits harder, feels more real.

The truth being, the impact is the same. But it may turn out to be even harsher, in the case of cards, if dues are not cleared on time. It is important to be aware and remember that the money spent via cards is debt. Which means it is more expensive and hence demands more prudence while spending.

Now that it is all revealed to you in black and white, make those cards work for you. Maximise the benefits as per your spending style and usage. Credit card is no angel or devil. Spending habits and personal finance management make it what it appears to be. Let there be no illusion, think real, be wise.

Photograph: an zuppinger/Creative Commons

The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.