Most of us in the UAE have at least one credit card and inevitably slip- ups happen. These can be simply forgetting to pay your bill or just ignoring the monthly statement, whatever the reason it can end up costing you considerable cash and is easily avoidable.
Unfortunately credit cards are not free money and banks will not reverse the charges because you where confused or unable to make payment. Ultimately the credit on your card and related repayments are only manageable by you.
The good news is that with a few changes most credit card mistakes do not need to happen. Within this guide we look at the top 10 the most common mistakes made with credit cards and what to do so that you are never charged a penalty fee again.
1 -Do not use your credit card to withdraw cash
At times we have all needed to get hold of some extra cash. Whether you are moving jobs, between paydays or simply overspent, withdrawing cash on your credit card will cost you.
All providers in the UAE will charge you in the region of 3% for any domestic cash advances.
Unlike a debit card where you already own the money within your account a credit card is just simply credit, a cash withdrawal is like taking a mini loan; it is actually a cash advance as you are loaning money from the bank and you must pay it back. As this cash advance is viewed as a loan a very high rate of interest is applied. Even if you clear your balance each month you will still be charged a cash advance fee every time you use your card to withdraw money.
What you need to know! Unlike credit card purchases, which are usually interest fee, you will start to pay interest on credit card cash advances immediately. This is in addition to the withdrawal fee that is applicable to all credit cards.
Withdrawing Cash abroad.
This is one of the quickest ways to rack up credit card charges. Not only will you be charged for the cash advances you will also have to pay currency exchange fees and possibly additional bank processing fees.
2 - Ensure that you make the minimum payment (and more if possible)
The mindset for many of us is if you do not have to pay more than the minimum, why would you?
If you only pay off the minimum amount on your credit card each month you will be charged a higher rate of interest than if you made over payments. Just making the minimum payment each month is not cost effective due to the interest applied by the bank. Think of it that only paying the minimum balance adds to the cost of all purchases you made that month. You save will in the long run by paying a little extra each month and benefiting from a lower rate of interest applied to your purchases.
The minimum payment balance is calculated off a percentage of your outstanding balance. If you only pay the minimum repayment each month it will take you much longer to pay off your debt and you will incur a higher rate of overall interest.
3 - Watch out for balance transfers
Balance transfer credit cards are an extremely effective tool when used correctly. They allow you to transfer outstanding debt with your existing provider onto your new credit card.
This makes sense when the rate on your new credit card is lower than the rate that you are paying on your debt elsewhere.
In the UAE it is common that providers will charge about a 3% fee of the balance that is being transferred. This is not something you want to do consistently as your debt may end up in a never-ending spiral, if you do balance transfer be clear on any transfer fees applicable before going ahead.
When Balance Transfer can really cost you….
Watch out for when the period of low interest offered on your new card expires. The initial low rates that made you switch your outstanding balance in the first place runs out and your interest is quickly hiked up. The new rate may even be higher than you where previously paying as banks will look to maximise their profits.
4 - Do not miss the payment deadline
With online banking and ATM pay stations it is now so easy to pay credit card bills. It is the mentality that we have “plenty of time” so why bother doing it now that leads to actually missing the payment date and incurring charges.
It is so simple!
Most banks will offer the service of paying off your credit card via a direct debit. A direct debit is a free pre-agreed automated payment which is taken from your bank account each month. You can opt for the minimum requirement up to 100% of the repayment as the default on the debit. This can always be complemented with extra repayments if needed using manual methods.
If you do not want to use a direct debit for the sake of saving yourself money, set a date reminder on your phone or mark your calendar each month reminding you to make payment.
When you pay online you will receive a confirmation of payment and proof from the provider, they will also tell you how long it will take for the payment to hit your account giving you peace of mind that your payment is completed in time.
5 - Do not use your credit card like a debit card
It becomes a dangerous habit when you start to use your credit card as if it were a debit card.
Purchasing coffees, magazines, and groceries is not a good idea unless you clear the balance on your card each month. You will end up paying for these items long after you have consumed them.
If you are reliant on your credit card for everyday spending then you may need to review your finances. Without changing this habit of using your credit card like a debit card your debt will continue to grow and you will find it very difficult to repay what you owe.
6 -Think before you close your account
Once you finally clear your credit card it can be quite satisfying to cut up the card. Before you do this consider the following.
With the introduction of the Al Etihad Credit Bureau AECB now providing credit reports, having a credit card can actually help you. Banks look for credit history when reviewing financial applications and credit cards are a good way of contributing to your credit report.
Making timely payments on debts you owe actually increases your credit score its better than having no credit history at all.
This is desirable to lenders as they like to know as much as possible about a client before lending money.
If you do decide to cut you your credit card make sure that it cannot be easily put back together or read once you have thrown it away.
7 - Remember that credit cards are not free money
Just because you do not physically hand over cash you are still using money and you must pay it back.
Research has shown that paying for item with cash registers a more significant event in your brain than a credit card. When cash is used it is linked with the fact that you need to stay within your pre-conceived budget.
As we don’t view spending on a credit card with the same significance it is easier to fool yourself into believing credit card purchases wont cost you.
This is not the case! Credit cards are debt, considered as a loan of credit and it is more expensive to use a credit card than cash or debit card, whenever possible clear your enitre card balance every month to avoid interest charges.
8 Always keep your card details secure
Credit Card fraud is one of the biggest challenges facing banks. Although a credit card is protected against fraud, if funds are taken it will take you a while to get back and as the victim you may still incur charges. There is a lot you can do to minimise the risk of fraud.
- Never tell a sales person or assistant your PIN
- Do not allow your card to be taken out of your sight.
- Never make purchases on a website you feel is unsecure.
- Never write down your credit card details and leave it with a retailer or merchant.
- Do not send your credit card details over email or messaging application such as ‘watsapp’. Keep your details secure at all times.
9 - Do not just get a credit card for the rewards
Rewards on credit cards can offer great advantages, however if you do not keep up with minimum payments you are effectively just paying outright for these benefits.
Various credit card privileges are revoked if you do not meet the monthly minimum spending requirements. Always check what you must spend to keep your rewards active.
If you have a credit card and do not use the advantages you can probably change your card to a card with a better rate and with no annual fee.
10 - Think, do you need more than one credit card?
The average number of credit cards held by a UAE resident is three.
The more credit cards you have the higher chance you have of incurring fines and fees.
Multiple credit cards also probably means a number of annual fees and different payment dates across the month. It only takes a missed payment with one card to start increasing your monthly outgoings.
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