MANILA, Philippines – Owning a credit card will not translate to more debt if you are using it wisely.
Financial analyst Ralph Ngo said one of the biggest mistakes of credit card users is the mindset that it can be used like free money.
He said most users find themselves in debt because they only pay the minimum amount required every month.
“People use their credit cards but they don’t have the capacity to pay in full. Worse, they just pay the minimum amount, that’s a no-no,” he said on ANC’s “On The Money.”
But if you’re going to pay the full amount due monthly, then what is the use of a credit card?
According to Ngo, it is best to only use it for emergencies.
“You can use your credit card if, let’s say, there is an emergency and it is understandable if you can’t pay it in full. But at least have a plan on how you can pay it sooner than facing the consequences or the burden of paying the interest only,” he said.
Not paying the full amount will incur big interest charges, which will eventually increase through time.
A credit card bill with P100,000 due, for instance, will have an interest per month of P3,500 due to monthly interest rate of 3.5%.
The minimum amount due for this card will amount to P5,000, which means only P1,500 go to the principal amount of P100,000, while P3,500 go to interest charges.
Paying the minimum amount regularly will also mean a negative rating on your credit record.
“It’s easy for us to spend but difficult to pay,” Ngo said.
He said another common mistake is neglecting to pay on time.
Most credit card companies charge late payment fees, so it is important to have the due date noted down in your calendar, said Ngo.
“Finance charges can go as high as 7.5%, and even if you call the credit card company to argue, they won’t listen,” he said.
To avoid these mistakes, Ngo said to think long and hard before purchasing something using your credit card.
“Before spending, think of the reason why you are spending. Is it really worth it, is there a need for you to spend or is it just a luxury or something you spotted at a mall?” he said.
If you have multiple cards, Ngo said it would be best to keep the other cards at home and leave in your wallet the card that you will use for that period.
To avoid incurring debt due to multiple charges, a person should only have a maximum of 2 to 3 credit cards.
Doing a balance transfer is also a viable option, but only if the bank is offering the lowest balance transfer rate.
Ngo noted that if you are expecting to receive money in the next month or so, it is still better to pay off what you can now and the debt in full when the money comes in rather doing a balance transfer.