Top 3 credit card sins

By Heinz Bulos

Credit cards can be a great friend and your worst enemy. Don’t commit these grave mistakes.

1. Not knowing the interest rate
Most consumers are attracted by credit cards that have rewards like free miles or cash rebates. That’s fine as long as you pay off monthly balances. But if you’re what industry insiders call a revolver—paying off the minimum—you’ll be easily hurt by interest charges. So, shop around for the best rates.

Also, check the annual percentage rate (APR) and not just the nominal rate. Figure out how interest is computed. Is it a straight computation based on your outstanding balance? Or is it based on your average daily balance? The formula can also be based on a shorter number of days, instead of a full 30 days.

2. Paying only the minimum
The best thing to do is to pay in full. If you find yourself paying just the minimum every month, it can mean you’re spending more than you can afford. You’ll be slapped with hefty finance charges. If you have a balance of, say P100,000, with a 3.5% monthly rate and a 5% minimum payment, it will take you an entire year and nine months to pay it off.

Now, if you have no choice but to pay the minimum, stagger your payments weekly and not pay the lump sum on the due date. This is because for many credit cards, finance charges are computed on an average daily balance. So with declining balances over the credit cycle, the average daily balance—and the interest charge—gets lower.

More importantly, cut back on your expenses. Manuel “Chut” Santiago, Jr., General Manager of UnionBank Card Center, says, “Credit card spending should be part of an overall spending plan. Cardholders should not spend more that what they can quickly repay.”

If your spending gets out of control, ask for a lower credit limit, or if things get worse, cut your card and pay in cash. Cecille Fonacier, Citibank Marketing Director, explains, “A credit card is a very convenient tool to have, if used responsibly. Remember that credit cards give you spending power, but not more money.”

3. Paying late
Pay your balances on time, every time. Even if you can only afford to pay the minimum, pay it on time. Late payments are costly as you’ll have to pay a late penalty fee of around 6% and a finance charge of 3.5% every month. Chut says, “Paying late or missing payments can quickly ruin your credit as well as increase the cost of maintaining the card.”

Now, if you miss a payment once in a while, ask to have your penalty fee waived. If you’ve been an overall good cardholder, you’ll get your wish granted. Remember, it never hurts to ask.