News Column

Use your credit cards with extra caution

September 3, 2014

I find it difficult to keep my card spending down and to manage repayments. What should I do?

Credit cards, or sometime covered cards, which are Shariah-compliant alternatives, can be a helpful and convenient tool for daily payments and an emergency source of extra funds. The monthly statements can actually help you track your spend, and assist you with budgeting your monthly expenses. However, your card needs to be used with extra caution as the fees and charges related to borrowing are among the highest you're likely to come across.

It's important to choose your card wisely. Make sure you check the fees associated with your card, and see how well it compares with the other cards in terms of the fees and the benefits it gets you. Also study payment terms carefully some cards have a hierarchy in place where the transactions subject to the highest finance charges, typically cash advances, are the last to be paid off. The fees charged when you use a card for cash withdrawals also need to be monitored, as cards will not only attract a fee on the withdrawal itself, but also subject any cash withdrawal to daily interest.

Once you're confident you have the card that's right for you, try to stick to 'safe' usage habits. The goal, even if you don't always meet it in practice, should be to pay off your credit or covered card balance in full each month, which will keep finance charges minimal to non-existent. Cash advances inevitably come with very high costs and should be avoided if at all possible. Before making a big purchase with a card, make sure you factor in how long it's likely to take you to pay off if it's more than a few months, you'll be running up a lot of finance charges and may want to reconsider.

There are also ways to make your cards work for you, and not the other way around! The competitive nature of the credit card market means issuers entice users with a wide range of giveaways and perks, from reward points and tickets to events to roadside assistance services. If you're a frequent traveller you may want to look into an airline co-branded card, which will help you accumulate miles every time you spend. Similarly heavy mobile users can take advantage of telecom operator co-branded cards that can help them cut their phone bills. It might be tempting to pile on as many different cards as possible to take advantage of all the incentives on offer, but this can end up being counterproductive as your spending will be spread across so many cards better to use only one or two and really rack up the points (or mileage). Having a wallet full of cards can also make it harder to track expenditure and encourage you to take on debt.

If you find your credit too much of a constant temptation to spend more than what you can really afford, you may want to consider switching to a debit card only, which performs many of the same functions but is linked to the funds in your bank account so you are only spending money you already have.

The writer is head of marketing at Abu Dhabi Islamic Bank. Views expressed are his own and do not reflect ?the newspaper's policy.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Khaleej Times (United Arab Emirates)

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