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10 Rules Of Using Credit Cards You Must Know

10 Rules Of Using Credit Cards You Must Know

Credit cards can be an immense boon when you hit a really rough patch financially, giving you much needed breathing space when you need your cash for pressing expenses like rent, groceries or gas. That being said, credit cards can quickly go from being a great financial safety net to something that gives you immense grief later if you don’t use them wisely.

Below you will find 10 credit cards usage rules. Rules that if you follow prudently will allow you to reap the benefits that credit cards have to offer, without having to deal with the headaches that they can otherwise bring. Here are our tips for using credit cards wisely.

1. Don’t sign up for every credit card that comes your way!

If you already own one credit card or if you have a decent credit score, chances are that you will inevitably receive pre-approved credit card offers in the mail. This, however, doesn’t mean that you have to sign up for each one of those offers.

First, see if you need another credit card at all. If you really do, take half an hour to read through the various invitations you have received to see which new card could give you the best benefits. The important factors that you must consider are APR%, annual fees, introductory 0% interest periods, late payment fees, the credit limit, and any add-on card fees.

Remember, signing up for many credit cards is not only a way to unnecessarily increase your creditor base, it is also a potential way to negatively affect your credit score.

2. Keep your card’s outstanding balance at $0, as much as you can

When you use your credit card, you know that your credit card company gives you a few days of interest-free grace. If you pay off your balances during this period, you won’t be paying any interest charges, while also having the ability to rotate your cash for a few days.

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However, this will only happen if you pay off your balances. Let the outstanding balance accrue for just one month and you will quickly start to rack up high interest charges.

3. Avoid the dreaded minimum payment habit

One of the worst pitfalls that lead to succumbing to the perils of a credit card is when you only make minimum monthly payments. If you spent $2,000 on your credit card, your credit card statement is going to instruct you to pay only 2% of your outstanding balance as minimum payment, a payment which works out to $40.

Now, if that credit card charges you a 20% APR, a monthly interest charge of 1.6% is going to apply on the $1,960 that you will have pending, assuming that you just paid off the minimum payment. 1.6% of $1,960 is $32.

In other words, even though you think you have paid off $40 from your balance, you have essentially paid just $8 ($40 less $32) off your total balance.

If you keep up this trend, you will actually end up paying $8,960, over 30 years, to eventually pay off the $2,000 that you borrowed from your credit card company!

Quite shocking, isn’t it? This is why it is very important that you do your math right when planning your credit card repayment schedule.

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4. Never, Ever Miss a Payment Deadline

One of the cardinal rules of intelligent credit card use is to pay on time, every time. Though a lot of people intend to pay off their credit cards on time, many just forget.

Missing your deadline by a couple of days might not seem like that much of a big deal to you, but credit companies will be very quick to levy late fees and even possibly increase your APR%, especially if you have been late on more than one occasion.

If you have many credit cards and have a hard time keeping track of all the deadlines, it makes a lot of sense to keep a monthly alarm on your phone or calendar for each of your credit card deadlines, to make sure that you are never late.

5. Check and double check your statement

It is not uncommon for credit card statements to have erroneous transactions. Sometimes, a purchase could have been billed twice on your credit card and you will never find out unless you physically inspect your credit card statement.

Moreover, if you use your credit card for recurring payments, especially for online facilitated services, you can quickly forget what charges accrue on your credit card statement every month.

Taking a monthly look at your credit card statement will allow you to stay on top of your expenses and also help you quickly investigate purchases or charges that might have been added to your account.

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6. Report lost or misused credit cards immediately

If you ever misplace your credit card or receive a text that shows that an unknown transaction has been debited to your credit card, it is imperative that you immediately call your credit card company to block the credit card.

When your credit card ends up in the wrong hands, your hard earned credit can get used up in just a few seconds. Though you will have the opportunity to prove that your credit card was used fraudulently, it will without a doubt be a long, frustrating and arduous process that you can easily do without.

7. Never withdraw cash from your credit card

If your credit card’s high APR% wasn’t bad enough, you are going to be in for a rude shock when you find out more about how much your credit card company is going to charge you when you do a cash advance on your credit card.

First off, you are going to be charged 2% to 4% of your withdrawal amount as a cash advance fee. Next, you are going to be charged an ATM fee, about $5. Then, on top of all of this, you are going to pay an interest rate that is much higher than your usual APR%. Lastly, you don’t get an interest-free grace period on your credit card cash advances.

8. Don’t charge your card just to earn rewards

Free airline miles, car rentals or redeemable points at various stores can sound like exciting incentives to use your credit card. You might think that it is one way for you to actually make the credit card company pay you for a change, right? Wrong!

The fact of the matter is that the odds are always in favor of the credit card companies. They know that you have to spend a significant amount of money on credit cards to earn a reasonable amount of points that you can then use like spending money. They also know that you will invariably falter when it comes to keeping your outstanding balance at $0.

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When they get the chance to accrue interest on your credit card, the interest you pay on your credit card is easily going to be more than the rewards you are eligible for, thereby giving you a financial expense instead of a gain.

9. Negotiate and bargain with your credit card company

Have you been a good credit card customer over the years, paying off your balances and keeping balances low? If yes, you deserve to be rewarded with lower interest rates. All you have to do is ask for it. Call your credit card company’s customer service line and ask for an account manager.

Once you get on the line with them, ask them for a revision of your APR%, citing that you deserve to be charged less for having been an ideal customer. You will be surprised to know that such revisions are often carried out by credit card companies. They will however rarely do it on their own though.

Pick up that phone and ask for it. You can also ask for late payment fees to be reversed when you make that rare late payment.

10. Call in advance if you are having trouble paying off your credit card

If times are tough and you just don’t see how you are going to feasibly pay off your credit card in the coming months, it might be prudent to make a proactive call to your credit card company, explaining your difficult financial situation.

When you do this, they will work with you on an alternative repayment plan. Besides getting slightly relaxed repayment terms and more time to pay off your credit card, you will also reduce the chances of your credit score being negatively affected the moment you miss or delay a payment.

Featured photo credit: Credit Card Volcano by Wilkins Gallo De Oro via flickr.com

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Last Updated on September 2, 2020

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

In this article, we will explore ways to set financial goals and actually meet them with ease.

4 Steps to Setting Financial Goals

Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

1. Be Clear About the Objectives

Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

2. Keep Goals Realistic

It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

3. Account for Inflation

Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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4. Short Term Vs Long Term

Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

How to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a two-step process:

  • Ensuring healthy savings
  • Making smart investments

You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

Ensuring Healthy Savings

Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

This is the focal point from where you start your journey of achieving financial goals.

1. Track Expenses

The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

If you’re not sure where to start when tracking expenses, this article may be able to help.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

3. Make a Plan and Vow to Stick With It

Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

Nowadays, several money management apps can help you do this automatically.

At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

4. Make Savings a Habit and Not a Goal

In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

  • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
  • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
  • If you go shopping, always look out for coupons and see where can you get the best deal.

The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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5. Talk About It

Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

6. Maintain a Journal

For some people, writing helps a great deal in making sure that they achieve what they plan.

If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

Making Smart Investments

Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

1. Consult a Financial Advisor

Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

2. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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3. Compounding Is the Eighth Wonder

Einstein once remarked about compounding:

“Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

Use compound interest when setting financial goals

    Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

    Start saving early so that time is on your side to help you bear the fruits of compounding.

    4. Measure, Measure, Measure

    All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

    If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

    Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

    The Bottom Line

    Managing your extra money to achieve your short and long-term financial goals

    and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

    More Tips on Financial Goals

    Featured photo credit: Micheile Henderson via unsplash.com

    Reference

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