Credit cards useful when used prudently: analysts

How many of us live a debt-free life? Perhaps, very few.

It's not unusual to find many people at a neighbourhood grocery shop digging into their wallets and bring out a credit card to pay for small purchases.

Whether we like it or not, plastic money has managed to become an inseparable part of our lives and also a key determinant of how we spend. "Credit cards are considered a necessary option of payment today, and it is important for individuals to own at least one," said Anil Chander, Head of Cards and Business Strategy, RakBank.

"When used and managed properly, they offer significant advantages to users.

"They are a convenient, secure and widely accepted form of payment, offering access to funds when needed for an interest-free period, and facilitating payment over a period of time in a flexible manner that suits the customer's financial resources," he said.

But it is also not very uncommon to find people going overboard when it comes to using their credit cards without understanding the risks they entail and, no wonder, often finding themselves back to the wall. So, isn't it time to restrain the urge to splurge and use your credit card prudently?

Default limits

Not all debts are bad, if you know your debt default limit before it's too late.

"It's necessary to make sure that the fee being charged on the product is appropriate for the level you're spending. Credit cards companies charge various fees and charges on credit card products and, therefore, you need to make sure that you don't spend over the limit that would attract overspend charges," said Richard Shepherd, Head of Credit Cards, Standard Chartered, UAE.

According to Steve Gregory, Managing Partner, Holborn Assets, Dubai, the biggest misconception about credit cards is that people believe it's their money and not the banks' money.

"Until they understand that every time they use their cards they're spending somebody else's money, they would never get control of their personal debt," he said.

In the UAE, credit card users far outnumber debit cards users. "Few people have a debit card at all, while many people have a number of credit cards," Gregory said. This is because people don't have a choice as many banks, regional as well as international, don't even provide a debit card in the UAE.

However, the number of credit card users in the UAE fell last year due to several factors, he said.

One, the credit limit has been reduced by a number of banks according to one's occupation and salary.

This has lowered the amount of lending on the credit cards. Secondly, the number of residents in the UAE has also reduced since a number of white-collar workers left the country because they lost their jobs. In addition, the credit and employment crisis has caused many to lose the use of their cards, by default, he said.

Debit cards, on the other hand, are a bit safer than credit cards, said analysts.

"The problem with credit cards is that you're spending the banks' money and not your own, whereas by debit cards you spend your own money. So debit cards are safer from this perspective," said Gregory. Most of the credit card users often go on living beyond their means. But, when a user comes to realise that he has overdrawn his account, it's too late.

"It is necessary for cardholders to manage card finances, as part of good financial planning and budgeting, at all times and even more so in times of tougher economic conditions," he said.

To avoid interest and late payment fees, cardholders must settle full payments or minimum amounts due on time," said Chander. Often, cardholders fail to assess their real needs for using the credit cards before they use them, said analysts.

Devil in detail

"It's important for the customers to understand their behaviour, their borrowing needs and the pattern.

"They also need to understand the fee charges and the interest rates of the cards they are using and match that with their behaviour," said Shepherd of Standard Chartered. He said, for any lending product, whether credit cards or personal loans, one of the major things required for a customer is to do self-assessment about one's credit worthiness. A bank always does credit check of a customer before giving out loan.

Similarly, a customer should also do a self assessment as to why is he taking the credit cards for.

So, what are the best ways to get the best from one's credit cards? It all depends on an individual's personal usage pattern. However, one needs to make sure whether one is using credit cards for transaction purpose, or for short-term debt. You shouldn't use a credit card as a form of long-term lending when the interest rates are higher, said Shepherd.

"It is important to limit the number of cards/banks one uses as one bank itself typically issues two cards and increasing the banks just multiplies the number of cards. Although, having different bank cards looks all glamorous initially, it becomes unmanageable soon," said Janany Vamadeva, Analyst, HC Brokerage, Dubai.

She said it's very important to read and understand the terms, conditions and charges as many users really do not understand the procedures and workings and end up paying charges/penalty fees merely due to ignorance of credit card terms and conditions.

Vamadeva said ensure credit card sales representatives follow the required risk management policies when issuing new cards rather than just selling them to increase their remuneration.

According to Mustafa Ramzi, Head of UAE Cards, HSBC, if someone can't keep up the repayment on his/her credit card, he needs to contact the credit card company immediately.

He said the other ways to get the best from one's credit cards are, namely, continue paying at least the minimum payment if possible; since the interest rate on credit cards is generally higher than other types of credit, pay off your credit card balance as soon as possible; and stop using your card or you'll make the problem worse.

On how to save on credit card interest payments, said Ramzi: "As a customer you can also revolve your balance previously and decide to pay off total outstanding for the current month. This way only balance off days of finance charges would be applied in the following month statement, that is days used after the statement is generated to the payment date."

Dos and don'ts of credit cards

Experts suggest various ways to be a smart credit card user. "Keep your PIN number secret and never choose your date of birth or another easy number as the PIN of the credit card," says Gregory of Holborn Assets.

Secondly, he says, notify your bank in case you're travelling abroad.

If you fail to inform your bank there's a chance that you won't get access to various facilities and services offered by your credit card in the country where you travel to. This is also necessary for banks to keep things secure and preventing abuse of cards, of course.

According to Mustafa Ramzi, Head of UAE Cards, HSBC, here're the things one needs to do and things you need to avoid.

DOS

- Keep physical check of the card in custody

- Always recover card from the merchant after the transaction and verify if its your own card

- Always check and tally the amount against the purchase on the transaction slip before signing

DONT'S

- Do not give physical card to any other person for their use

- Don't forget to sign the plastic immediately upon receipt

- Don't disclose any pin provided by the bank

How to avoid credit card defaults

One of the safer ways to avoid credit card defaults is to make the payment on time.

"It makes great sense not to make only the minimum payments each month. If a person pays a minimum amount against his outstanding bill each month, the debt is going to increase in value.

"So if the minimum monthly payment is five per cent each month, a cardholder should try to pay more than that, say at least 10 per cent.

"That way he can reduce his outstanding balance. But if he pays just five per cent, his outstanding balance would creep up and up," says Gregory of Holborn Assets. The next important point to check is the credit shield, he says, as banks don't tell openly about credit shield.

Credit shield is a kind of insurance if someone defaults and might provide insurance against redundancy or loss of job. If someone has credit shield that includes redundancy, the insurance pays one's credit card (or loan) payments for six months, if the person loses his job.

"Therefore, it's better to ensure you know whether the credit shield one opts for provides coverage against redundancy or job loss, as well as sickness and disability.

Additionally, one needs to know that his credit card interest is the highest rate of interest on any loan. It's not unusual for credit card interest to be more than 30 per cent a year, if the payment is not paid on time, he says.

"Limit usage to capacity especially in the current environment when things can change overnight and ensure timely payments.

"If things are too dire, it is better to inform the bank and come to some sort of agreement that is in the best interests of both the parties," says Vamadeva of HC Brokerage. He says customers should talk to the bank if financial situation looks bleak.

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