The Credit Card Trap (Part One)
Plastic. For a growing number of Filipino consumers, credit cards have become the preferred mode of payment, from dining out in a restaurant to paying for the wide screen TV on installment.
It's also becoming a major problem for regular people who find themselves tens of thousands of pesos in debt. In the first quarter of this year, credit card bills that were past due topped P13.8 billion.
We talked to Fol Rana, Jr., Vice President for Sales & Marketing - Retail of Equitable Card, one of the major players in the industry, on how to manage our use of credit cards.
It's just a tool. Rana stressed that credit cards are just an aid in your finances. "If you don't have cash, it allows you to purchase items." Combining the billing period and the grace period before you're charged interest is the equivalent of 30-45 days of free money (that is, if you pay the balance in full when it's due).
But it's still a loan that you have to pay. Unfortunately, there's a certain detachment when we charge for purchases, as if there's no tomorrow. It's just not the same as when we grudgingly pull out cash from our wallet. Says Rana, "With cash, you see value. With a credit card, you see plastic."
Have a good credit record. Keep this in mind when you miss a payment…again. Your credit card payment history affects your credit record, which is a factor when you apply for other loans, like a mortgage or housing loan.
Although there's no credit bureau in the country, credit card companies have an arrangement to check balances of their customers. They also check the banking industry's negative file information system.
So it is a good idea to use a credit card to establish your credit record when you're just starting out. "A person with a credit card history has a better chance than someone with none," Rana points out.
Get rewarded. The other good thing about using credit cards is the payoff like free airline miles, rebates, discounts, and reward points, which you can use to claim items or waive your annual fee. If you're a good customer, you can get invited to special events and promos. However, these extra features should not be your top priority when choosing among credit cards, particularly if you're not the type who pays in full.
Study your finances. Find out how much you're earning and spending every month to give you an idea how much you can afford and how much credit you really need. Rana explains, "If your card can cover your expenses, then don't ask for more cards." More cards and higher limits mean greater temptation to overspend.
Track your expenses. The problem with credit cards is you'll only find out your bill once a month. Often, you get shocked by how much you charged. There's another way. Use the phone or the Internet to track transactions and balances, if your credit card company offers such facilities (perhaps this should be one of your criteria in choosing a credit card provider).
Control your expenses. If you track them, you can better control them. Don't exhaust your credit limit. Rana says you can even request the card company to decrease your limit. He also suggests you just carry one or two cards instead of all.
And if you really want to keep your credit card costs low, don't do cash advances, which charge you an interest the moment you get the money. Pay at least the minimum to avoid late payment charges. In fact, pay more than the minimum to lower interest charges. Better yet…
Pay in full. Rana explains there are two types of cardholders - revolvers, who pay the minimum amount due, and transactors, who pay in full.
Card companies love revolvers more, because they earn from interest charges. They are also less likely to cancel, as they always have a balance to pay. If you're a revolver, don't worry about being seen as a bad customer. Paying just the minimum doesn't trigger concerns as long as your credit limit is commensurate to your capacity to pay. Just don't expect to get an automatic increase in your limit or an upgrade.
But don't feel guilty if you're a transactor and want to help your friendly neighborhood credit card company. Card companies still make money off you through annual membership fees. But even if you manage to have this waived, they still earn from their member merchants.
Pay on time. Even if you can afford to pay the minimum, pay it on time. Late payments trigger red flags if they happen regularly. There's no excuse for not paying. Rana says, "Even if the bill arrives late, as a responsible cardholder, you have to keep track when to pay." Besides, he adds, there are many methods of paying, including auto debit, the ATM, phone banking, and online.
Watch out for part two where I write about the fine print.
