Building Healthy Credit Card Habits

Barbie isn't the only plastic that was hot this summer. In the US, credit card balances shot up by $45b between the first and second quarters of 2023, a 4.6 per cent increase that pushed total credit card debt past the $1t mark, according to the Federal Reserve Bank of New York. Credit card debt is also on the rise in Jamaica. Credit card debt owed by Jamaicans, as measured by commercial bank credit card receivables, has risen 18 per cent over the last year to $72b as at July 2023, according to data from the Bank of Jamaica.

Credit cards can be powerful financial tools when used responsibly. They offer convenience, security, and the opportunity to build a positive credit history. However, they can also lead to financial challenges if mismanaged. There are still so many credit card holders who don't understand that there is a correct and an incorrect way to use their cards. If you are contemplating getting a credit card, or even if you already have one, it's crucial to understand some fundamental concepts. Understanding your credit card is key to good credit card management because it arms you with basic knowledge of the product and how it works. That knowledge puts you in a position to avoid misuse. Here are some key terms associated with your credit card that you must understand.

• Credit limit: This is the maximum amount you can charge on your card. Exceeding this limit can result in over the limit fees.

• Interest rates (APR): Credit cards come with an annual interest rate, often referred to as the Annual Percentage Rate (APR). If you don't pay your full balance by the due date, you'll be charged interest on the remaining balance. APRs can vary widely between cards. However, you need to know that the interest rates on credit cards will all be high, regardless of the card, because credit card is really unsecured debt, and the bank charges you interest accordingly to reflect that risk. In Jamaica, the interest on your Jamaican dollar credit card can be as high as 50 per cent. So, it's crucial to understand the rate associated with your card.

• Minimum payment: Credit card issuers require a minimum monthly payment, usually a small percentage of your outstanding balance. However, paying only the minimum can lead to a vicious cycle of debt because you'll still be charged interest on the balance, and that interest rate is very high. As such, try to pay more than the minimum whenever possible to eliminate your debt quickly.

• Payment due date: The payment due date shown on your billing statement is the day a payment is due. It usually falls on the same day each month, and at least the minimum amount will be due on that date. If you fail to make this payment, you will be charged late fees on top of interest.

• Billing cycle: Your billing cycle refers to the period your credit card statements are generated. All your purchases during this usually one month period will become due for payment on your payment due date. For example, your billing cycle could run from the 6th of one month to the 5th of the following month (your statement date), and the due date would be around the 30th of the month of your statement date. Understanding your billing cycle is key to being able to time your purchases and unlock the potential of your credit card to put you in a position to manage your finances better.

Now let us dicsuss four best practices in the proper use of a credit card:

Understand your credit card and how it works: Whether you've been using credit cards for years or you're applying for your first one, they can be confusing. Depending on how you use them, credit cards can either be incredibly dangerous or immensely helpful. Therefore, when it comes to your credit card, how well do you know your account's terms and conditions? What happens if you miss a payment? How is your minimum payment calculated? Are you making the most of your card's rewards? Having a credit card is a big adjustment and maintaining it is an even bigger ask. Therefore, understanding the ins and outs of your card before diving in will save you money and help you maintain a good credit history.

Use your credit card responsibly: The second step in good credit card management is to spend responsibly. One of the most important principles for using credit cards is to always pay your bill on time and in full. When you do this, you avoid incurring high interest charges (which are often referred to as penalty APRs), late fees, and, poor credit history. Timely payments are crucial to help you avoid mounting debt. Paying the full balance on your credit card every month is the most financially responsible approach. It ensures you don't incur any interest charges. In fact, when you do this, your credit card can actually function as an interest free short term loan. Therefore, your best bet is to not charge your card for an amount you know you have no way of paying back on the due date. Buy only what you can afford to pay when the bill becomes due. This way, you can avoid credit card debt and be in a position to realise your financial goals down the road.

Pay more than the minimum balance each month: Even if you can't pay off your balance in one go, pay down as much of the statement balance as possible on the due date and in the time after that. Avoid the temptation to pay the minimum balance to reduce the amount of interest you'll pay and the risk that your debt will balloon. If you can't afford anything more than the minimum payment, at least ensure you make it on or before the statement due date. By doing so, you keep your account in good standing. But if you pay only the minimum, you'll carry a balance and be charged interest on that balance. Remember, your credit card payment history is one of the factors used to determine your credit score, and in Jamaica, if you have a poor credit score, it can hinder you from getting a job or applying for a mortgage when the time comes.

Avoid spending over your credit card limit: The majority of credit cards assign you a credit limit when you open an account. If you exceed your limit and haven't opted for an over-limit programme, your card will be declined. In this case, you will have to provide another payment method to complete the transaction. Some cards/banks allow you to spend over the limit, and this feature may be activated on your card. If your bank allows you to go over your credit limit, it might apply a penalty interest rate or an over the limit fee. You should review your credit card agreement for details on what actions may trigger a penalty interest rate. Importantly, regularly going over your limit can be a sign that you are overextending yourself financially. Call your bank to find out if your card has this feature and deactivate it if it is active so that in the course of spending, you do not risk going over the limit and attracting fees.

A credit card can serve as a great tool for managing your finances and building and maintaining a strong credit history. However, keep in mind that along with the benefits come great responsibility. As the holiday season approaches, equip yourself with the knowledge needed to make smart choices when using your credit card. This will allow you to get the most out of the benefits they provide while avoiding getting caught in a cycle of indebtedness.

Nadine Thomas, assistant vice-president – Private Wealth, NCB Capital Markets Limited

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