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Credit cards certainly make life easier – they are simple to use, accepted almost everywhere, and help you to buy what you want, when you want, particularly online. So much so, that living close to the credit limit has become the norm for many people and spending can quickly get out of hand. To make your credit card work in your best interests, it’s important to fully understand their function.
Cash advances cost more
When money is tight, people are forced to use their cards for cash advances (withdrawing cash) instead of just purchasing goods and services… and in doing so, are paying a high price for the privilege.
Interest is charged immediately on a cash advance and at a higher rate than on purchases. Even if you have an interest-free card, you will immediately start paying interest as soon as you withdraw cash using your card. If you must take cash off your card, repay it as quickly as possible.
Paying for rewards
Credit cards with a “rewards program” usually come with an annual fee. This charge can be anywhere between $20 and $750 per year, plus extra for any additional cards on your account. If you are not going to use the features offered by these programs, it’s best to exchange your card for one without all the bells and whistles and no annual fee.
Beware of merchant fees
If you own a business, offering payment by credit card means you get paid straight away without the risk of holding large amounts of cash. Of course, banks charge a fee for card services, typically between 0.3% and 1.8% of the transaction cost, but can go higher.
Businesses can charge the same price to customers whether they bought their goods with cash or card, and they can also apply a surcharge. The surcharge is not compulsory however businesses must tell you that it applies before you make your purchase and publicise the surcharges that apply to different credit cards. Watch out for this extra cost, particularly on online purchases.
Are you getting the best deal?
When reviewing your credit card ownership, the moral is “be aware” – like any other service, you are paying for the convenience. As long as the benefits outweigh the cost, stick with what you’ve got. But with banks offering more attractive deals, it pays to check other options to see if you can get a better deal – but ALWAYS read the fine print first.
Most of us couldn’t get by without our credit cards but the secret of success is to keep your spending under control and pay the full balance off every month; otherwise the only winners are the banks.