- Personal Finance
Credit Cards are Not Evil.. as Long as You Know the Devil
Who is evil? Credit card?
This week the Central Bank of Sri Lanka lifted some cap limits on credit card interests rates, credit card fee charges and loan interest rates. People are now scared for credit cards. Should they?
Reading through the news items about this decision I saw a lot of comments where people have said not to use credit cards, they are evil, they make you go broke, etc. I’ve seen similar comments many times on the web and heard when speaking to friends and family. But rather than complaining about the product it is wise to think whats really wrong about it. Is it the card or is it you?
Having a credit card in your wallet does not make you pay money to the bank. Its your financial discipline or lack of it that will make you waste money. If you use the credit card wisely you can actually save money and make money out of it than not using a credit card. I’ve been doing that for a long time and I’ve explained below how you can do it too!
Know the bank’s fee traps
First of all you need to learn how the banking ecosystem see the credit card product and how banks make income for them by using simple fee traps. Then you will know how to stay away from those traps. Banks make money on credit cards through the fee income they charge on us. These fee income include joining fee, annual fee, late payment fee and most importantly the interest fee. As a customer with a credit card we must make sure to avoid most of these if not all.
Pay your bill in full and on time
The easiest fees to avoid is the interest and the late payment fee. This is totally under your control. Simply make sure you pay the bill in full (not the minimum payment or not anything lower than the billed amount) exactly on the payment due date or few days before the due date.
Bank has different policies on how they charge interest on unsettled credit. HSBC in Sri Lanka charge for the full bill amount even if you have paid majority of it. In other words if you have paid Rs.99,000/- of a Rs.100,000/- monthly bill, HSBC would still charge the interest on the full Rs.100,000/-. Other banks are better in this and they only charge the interest no the outstanding unsettled amount which is just Rs.1,000/- in the above example.
Late payment charge is charged on you if you have not made at least the minimum payment indicated in the monthly statement on or before the due date. Late payment charge differs from bank to bank.
As long as you pay the bill in full and on time you will not be charged with any late payment fee or interest. This is important because these two amounts to the biggest expense and the biggest trap in any credit card product. If you are missing the payment dates then make sure you mark it on your calendar or put a reminder in your mobile when you receive the monthly statement. I’d advice you to pay on the due date but try to pay up few days earlier than on the due day if you have a tendency to be busy without prior plans and miss the due date.
Avoid cash advancements at all cost
Credit card interests are one of the highest credit interest rates in Sri Lanka. It stood at 24% and with the removal of the caps yesterday some banks has increased it to 28% now. Therefore if you are in a cash tight situation, even borrowing money from your neighbourhood “poli mudalali” (money lender) might be a better option than taking a cash advancement. The interest on cash advancements are charged from the cash withdrawal date till the credit card statement date.
For those of you who don’t know what cash advancement is it is good that you remain that way. Cash advancement is where some banks (such as HSBC) allow you to withdraw money from a bank’s ATM using your credit card. Usually the cash advancement limit is much lower than your credit limit and stands around 30% to 45% of the credit limit. Further cash advancement interest rates could be higher than the interest rate for credit card transaction. Please avoid this at all cost.
Can we avoid joining and annual fee?
Unless you are a special or a VIP customer of the bank, avoiding joining and annual fee is not an option. But still there are ways to limit how much you pay as these fees. Banks has different joining and annual fee structures for different tiered credit cards. Each tier has different benefits and credit limits but more credit or benefits also mean that joining and annual fees are also high. So pick a tier that is sufficient for you. For example if you are not planning to spend more than Rs.50,000/- per month then a lower tier card is sufficient. Also remember that if you are a long standing customer, banks voluntarily offer you to upgrade the tier. Usually this happen when you reach the maximum credit limit of the tier your card is currently in. Do not jump into this without weighing the pros and cons because you are probably jumping into a trap again. Unless there is a need always avoid an upgrade because subsequently you will be paying a higher annual fee for credit you probably won’t use.
If you have a partner and need to have separate credit cards for each one of you a way to reduce the joining and annual fee is by getting a supplementary card for your partner than two separate primary cards. Supplementary cards are additional cards issued against your primary card and all supplementary cards will share the same credit limit of the primary card while you will be receiving one monthly statement for all card usages/transactions. What is interesting is supplementary cards has a much lower joining fee and annual fee than a primary card (usually about 1/2 the primary card fee).
If you are a special or a VIP customer of the bank you may quality for special credit card issuance promos to get a card with joining fee or annual fee or both waved off for 1st year or for life. For example I’m using a complementary HSBC Advance Platinum credit card issued by the bank and it does not carry any joining fee or annual fee for life. Further I have a supplementary card given to my spouse which is also not carrying any joining or annual fee and is free for life as well. But I received this complementary card because I got a personal loan from HSBC and they issue these types of card if the loan exceeds a certain limit or if you have deposits exceeding a certain limit. I used to have a standard HSBC credit card and since I got this Advance Platinum, I discontinued my old card. Likewise different banks may have different credit card issuance promos. Sometimes you will have to ask for it or say what a competitor bank is offering and motivate your bank to give you something.
What you get on credit today has to be settled in future
You got to remember a credit is a credit. Which means what you buy today on credit has to be paid tomorrow. To do the payment on time, you need to have sufficient money when the due date arrives. Therefore do use the credit limit wisely and always think whether you can get money by the due date or whether your income or salary support such a credit to be settled by the due date. Banks are happy to increase your credit without you requesting because they know some day you are going to use the credit without sufficient funds to settle it and they will collect the fee income in the form of interest and late payment fee. You must be responsible and disciplined enough to use your credit limit wisely. Don’t use the full credit just because your card has. Remember, the banks issue a credit limit of several months worth of your salary even for a new applicant.
Check the promos before your shop
Sri Lankan banks offer loads of discounts, promotions and other benefits on their credit cards. But its important to do your research and find what banks’ offers are more inline with your lifestyle before choosing a card. Some banks offer upmarket promos and benefits while some offer more day to day promos and benefits like discounts in supermarkets. Therefore pick a card or 2 that are more close to your lifestyle.
Always keep a tab on the promos and discounts on offer. As a practice before I do my weekend shopping I’d check the promos available in each card. Then I’d decide which places I want to shop. When it comes to grocery shopping, HSBC has frequent discounts and promos at Keells Super while Sampath Bank has at Cargills Food City. So pick what to buy where. A good way to keep track of these are to subscribe for SMS alerts as well as to check the bank’s website for credit card promotion.
Avoid lottery promos. A lottery promo, as I term; are promotions that are not guaranteed of a benefit to you. Typical example is “Pump fuel worth Rs.5,000/- or more using your credit card and stand a chance to wipe out your fuel bill”. These types of promos has a change of winning and a greater change of loosing. So avoid those and always go for guaranteed promos like “15% discount on your total bill if you shop at ABC supermarket with your XYZ bank credit card”.
Get the 2% fuel surcharge refunded
If you pump fuel in Sri Lanka using your credit card (and debit card) you are subject to a 2% extra charge which is called the surcharge. Most Sri Lankan banks refund this back to the cardholder but some banks don’t. As a fact HSBC does not refund the surcharge. Therefore either use a credit card of a bank that refund this fee or use cash when pumping fuel.
Keep a track of your transactions
Do not assume the bank is rite. Do not assume your statement is correct. Always keep your own personal account of all credit card transactions. This is very important because credit card frauds are on the rise globally. Unless you can prove you have not done a transaction or the transaction amount is wrong, you will not be able to get the amount compensated from the bank.
It is also important to know that there are practical reasons that generate duplicate or wrong transactions. A credit card payment involves a long process of information channeled back and forth through many computes, networks, multiple banks located in several countries. This process is not always fail safe. Hence once in a while you might end up getting a duplication transaction or a wrong transaction.
Therefore always keep your credit card slips with you and reconcile them with the monthly credit card statement. The better way to go about this is to register for the SMS alert service from your bank. SMS alerts are where you get an SMS to a pre-designated mobile number each time a credit card transaction is approved or declined. Almost all banks in Sri Lanka offer this free of charge and since you receive the SMS within few minutes of the actual transaction you are much aware about the transaction than reconciling at the statement date. Further if the SMS comes for a transaction you didn’t do, the chances are your credit card details were hijacked by a fraudster so do call the bank, lodge a complaint and get your card blocked.
Register to the rewards program
Almost all banks nowadays has rewards programs for their credit cards. They also provide discounts promotions against the rewards points. Make it a point to always be a part of this rewards program. Some credit cards comes with the rewards program automatically attached but some may not. Remember to use the credit card everywhere you can so that you earn more rewards points. Next you need to always be in the lookout for good deals on these rewards programs. It could be a chance to but an air ticket cheap or book a hotel against the rewards points. So keep a lookout on the rewards program promos in the bank’s rewards program website.
Some rewards programs allow conversion of rewards points to some other form. HSBC for example allows converting rewards into Dialog Star Points of loyalty points of some airlines’ loyalty programs. What I usually do is convert my HSBC rewards points to Dialog Start Points and then pay Dialog mobile bill using the Star Points. By doing so I convert my HSBC rewards points into money.
Some banks expire rewards points after some years and those expiring points are usually indicated in the monthly statements well in advance. Make sure to consumer/use these points before they expire. It is important to keep a track of how many points were added, how many were redeemed/used and how many were deducted due to expiry because I have experienced that one of my banks deducted rewards points as expired though I have consumed/used them before they expired.
Take advantage of 0% instalment plans
Some banks offer 0% instalment plans with selected merchants and products. These could be through out the year or seasonal offers. These 0% instalment plans are great way to buy expensive household items or an air ticket or a vacation without spending your savings up front. A 0% instalment plan is where the seller and the banks has a special agreement to sell a product or a service by breaking the cost of the product or the service into equal monthly instalments. The plans are usually 3 months, 6 months, 12 months or 24 months long. Your card will be charged with a transaction at the specific day of the month you originally purchased the item during the plan period. You are required to sign a contract with the merchant to initiate this on the date of purchase.
But you also need to remember that some sellers offer reduced prices for outright cash purchases. Therefore always compare the cost and benefit between a outright cash purchase and a 0% instalment plan purchase.
Use only a limited number of credit cards
Unless there is a pressing need I don’t see why anyone should have more than two or three credit cards. I use two one from HSBC and the other from Sampath Bank, each belonging to 2 different credit card networks. But I’ve seen some people has more than 5 credit cards. Unless these cards are issued by your employer or comes with annual fee or other fees waved off all other instances you are making a loss by just having them in your wallet. So get rid of the cards you really don’t need.
So those are the small tricks and things I use to save money and make money from my credit cards. Hope you will benefit from this too!