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Personal Finance

Demystifying the Credit Card

By Tara Cabullo, Brighterlife.com.ph

Comments (6)

Credit-CardOne normal morning, a thick, white fat envelope arrives for you. You do not remember having anything billed to you and it’s rare that you get such. When you slash it open, you see a letter addressed to you from a company you don’t remember talking to. The letter comes with a shiny plastic card with your name on it. You scramble for the letter again and digest the fact that you have in your possession, something that you just need to swipe, instead of paying cash when you purchase anything. Anything. In. The. World.

The world around you stops and your eyes sparkle: It’s free money.

No, not really. Ladies and gentlemen, behold: the credit card.

The credit card has been typically handed to most eighteen year olds these days as a sign of adulthood. It is a rite of passage in most countries, which signify a teenager’s transition to the big world of handling money. Except that nobody teaches us all how to handle a credit card until we’re waist-deep in debt and being called on the phone by the collecting agencies everyday.

Before you cut off your cards, know that credit cards ARE amazing – when used properly. Credit cards allow us to buy things without having to bring cash around, and earn rewards, too. Credit cards allow us to buy things abroad without having to have our money exchanged. But mismanagement of credit cards and having the wrong perceptions about it can lead us to a mountain of debt.

What to do? What to remember?

1. Choose and stick to one credit card. If you can live without it, better. But as you grow older, you will be traveling internationally, purchasing things online that you cannot buy with physical cash, and thus, you will need a credit card. Choose one that fits your needs, either of the two most accepted {Visa or Mastercard}.

2. Each swipe is a loan. In Filipino, it is utang. The credit card is your credit line with the bank. Your credit limit signifies as to how much you can charge to the card. That means that is the amount you can borrow. Whenever you swipe, always remember: Do I have this in cash? Is it something I can pay with cash right now? If your answer is no, think twice about purchasing that new, equally shiny smartphone. Remember this always: If you really need to buy something with a credit card, you must be sure you have the capacity to pay for it. 

3. Credit cards charge interest. This is how credit card debt charge interest: Say you swiped PHP 5,000 for this month. Upon the due date, the statement said your minimum payment is PHP 500 so you pay PHP 1,000, since you’re feeling generous . By next month, your bill states you now owe the bank PHP 4,640.00. Now, where did the 140 come from, you ask? This is what we call interest. Standard interest is usually 3.5% of your total amount due, compounded annually. Again, you follow the minimum payment because that’s what the statement asks for, which is PHP 500. The next month, you get frustrated, because your statement says PHP 3,802. All in all you’ve already paid PHP 2,000 since and you’re still stuck at owing PHP 3,802. What is up, you ask? Interest. The best way not to ever pay interest? Pay your credit card bill as soon as you use it. Pay the full amount on your statement. And remember to always pay them on time.
*Minimum payment is 1% of total due amount or PHP 500, whichever is higher.

4. Credit cards have maintenance fees. And there’s an equivalent fee that goes with it. An average credit card annual fee ranges from PHP 750 to PHP 5,000, depending on your limit. If you’ve been on time with your payments, your banking officer might waive it off for you.

5. Higher limit means more responsibility. Say you’ve been a good credit card user. This will trigger your credit card company to raise your limit from {example} PHP 30,000 to PHP 50,000, which means you can now buy PHP 20,000 more than you could, a month ago. Tip: lower or increase your limit depending on your planned usage.

6. Swipe it yourself. While this is very common in North America, it is yet to be exercised in the Philippines, where your card will often be brought to the cashier for swiping. If you can, you can join the cashier as he does this. For other purchases, always look at your card and be vigilant.

7. Look for verification. Online transactions are getting customary, especially for digital natives who buy everything online nowadays. Remember to look for the Verisign logo as you’re typing in your credit card info, to signify that the website is not bogus.

8. Track your expenses. Swiping your credit card does not feel the same as handing out cash at the till. The wallet doesn’t seem thinner and there is nary a sinking feeling of losing hard earned money. This is why you have to keep a small notebook for all your expenses, both cash and credit, to know where you are fiscally, everyday. Without an ATM balance, a credit card holder will tend to forget how much he has spent. Avoid the shock of your life by listing every single cent.
Got credit card handling tips? Share with us through the comments section.

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ekzchan143 on

Nice article. I’m about to get one of this. Great help! 🙂

flameskywiper on

You forgot to mention the insurance coverage. I was surprised when my credit card issuer charged me a certain percentage (<1%) every time I use my credit card as insurance. I seldom use my credit card because of that. I still have to call the bank and ask to remove the insurance as I pay the whole amount I owe before the due date so there's no need to have an insurance. That's what I thought.

    jillsabs on

    What card is this? Shouldn’t you give your permission first before you get charged insurance by your credit card company?

      flameskywiper on

      That’s what you have been done by the card issuer, to ask permission or at least to inform the card user before charging anything but this wasn’t the case. Btw, the card is Visa and the bank is outside the country.

Elvin @ Journey To Millions on

Like flameskywiper, when I got my credit card I was surprised to see that I was charged for the things I didn’t buy such as insurance – a recurring credit card expense.

For first time credit card users, be sure to remove these if you don’t need them. Who would want to pay for fees that you do not want in the first place? Also, be vigilant in checking your outstanding balance and pay them right away. Call your credit card company if you have questions.

Harvard Uy de Baron on

Great article but I disagree with number 1. I have 3 credit cards for the purpose that each one is used for a particular purpose. Having noted all your points, 3 credit cards is actually better. I have one for groceries and bills which gives 5% rebate on payments. Another for 3% rebate on gas purchases. Another for international and for points/miles accumulation. 🙂

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