How to avoid credit card debt
JN Bank's Visa Classic credit card .

WHILE we've explored the positives of credit cards over the last two weeks, it's important to also discuss how one can avoid the dreaded credit card debt.

Credit card interest rates tend to be the highest rates which will be charged to a borrower of credit. In Jamaica, this can go as high as 50 per cent for an unsecured credit card. While First Global Bank's (FGB) Visa Platinum card has an interest rate of 19.5 per cent, one should pay off the statement balance in full by the due/payment date for any credit card. If even $0.01 is left on the card by the due date, interest will be charged in full on the statement balance and not the $0.01 which is left to be paid.

Most credit cards have a minimum payment amount that they require you to pay in order for the credit card to remain in good standing. This might be a percentage of the statement balance or a fixed amount which must be paid. While paying the minimum balance will keep your credit card in good standing, it is a sure-fire way to sink yourself into spiralling credit card debt. If you have $7,420 as your statement balance and have a minimum payment of $371, it will take you 44 months of payments at a 49.50 per cent interest rate to fully pay off the credit card. This is because interest is being added after every period.

The best thing to do is to have a budget for a credit card, just like how one would budget for spending your salary with a debit card. The only difference between a credit card and a debit card is that you pay down the balance on the credit card later while you must pay for any good or service immediately with your own cash. However, a credit card carries additional benefits for persons who use them appropriately for their everyday expenses.

FGB's Visa Platinum card gives the user one point for every $100 spent, to be used in their 'Rewards Your Way' programme. There is also the priority pass option to 600 airport lounges worldwide plus auto rental and travel accident insurance coverage that comes from using the card. Even their Affinity Visa card benefits the alma mater of the user, with one per cent of the purchases going back to the development programme of the user's school. Even JN Bank's Classic card gives the option of benefiting from discounts at almost 200 local merchants.

Credit card issuers make money not only from the annual fee charged to use the card in most instances, but also when you fail to pay your statement balance in full or pay late. They make money from the interest charged on the balance and with late fees as well. Even merchants who accept credit cards are charged a fee which tends to be a percentage of the amount processed. As a result, some merchants keep their prices a little higher to account for these card-processing fees that tend to be higher for credit cards.

Thus, the best thing to do is to capitalise on the incentive banks provide for cardholders to use credit cards over cash. An example is with Sagicor Bank's PriceSmart Visa Gold credit card with which users get four per cent cash back every time they spend at PriceSmart Jamaica and one per cent everywhere else. Thus, you get four points if you spend $100 at PriceSmart and one point if you spend $100 anywhere else. Sagicor Bank was offering a welcome bonus of 3,000 points for persons who signed up recently, with the minimum number of points required for a redemption being 3,000 points. This is equivalent to $3,000 and would be applied as a credit to the credit card account when redeemed.

When you look at it, you're being rewarded for spending with credit and not using cash. Once you manage your credit card effectively, you can benefit from the normal protections afforded from using a credit card and also build a solid credit history. This would not only improve your relationship with the issuing bank, but also make you more creditworthy to other lending institutions. With both Visa and MasterCard partnering with different local firms to give discounts for persons who use the cards with specific merchants, life could not get any better.

However, one has to be conscious of the credit utilisation rate and how a larger credit limit can impact your credit scores and other important ratios. The credit utilisation rate is the amount of credit debt you have outstanding relative to the total credit available. You want it to be low, but you also don't want to have multiple credit cards with an outsized amount of credit available. It's best to limit the number of cards one has and also ask the bank to reduce the credit available so as to protect yourself and keep your ratios intact.

So, while a credit card carries some extraordinary benefits for the cardholder, it's just like any other debt which requires sound financial practices to avoid putting oneself in ruin. It's best to get a debt consolidation loan if the debt becomes quite large, and it's also important to keep your spending in check as well. Nothing is wrong with debt, but the way it's used can make the difference between a trip to Miami with your rewards points and having an uncomfortable conversation with your bank relationship officer.

FGB's Affinity Visa credit card. .

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