How to protect yourself from credit card

Last week, I read a story from a personal finance blog, about a first hand experience of credit card’s two-cycle billing. This was followed by an update on the post a few days later to clarify what really happened after he got a call and explanation from the credit card company. He was informed that the reason for the finance charges was actually NOT because of two-cycle billing. Instead, the finance charges on the next month’s bill was due to “grace” period no longer applicable because of NOT paying the full outstanding balance from the previous month. In contrast, here’s an excerpt from the blog on what two-cycle billing means.

“Two cycle billing is when a company computes finance charges on the average daily balance of the last 60 days rather than just the last 30 days. What that means is that they will go back two billing periods before the cardholder sent in their payment, and average the daily balance of all 60 days.”

Reading through the blog post, I wondered how come financial terms are very confusing. I definitely agree that the best way to not experience the “two-cycle” billing or “grace” period headaches is to pay the full amount every month. It makes better financial sense. If you can’t do that, perhaps, it’s a good idea to learn how to protect yourself from credit card debt by some other means.

Why can’t financial terms be simple, the way red, green and yellow means stop, go and go slow on a traffic light? Ever since my credit card debt, I’ve tried to read books on financial literacy to help me get familiar with financial terms. Reading Robert Kiyosaki’s Rich Dad, Poor Dad book helped me realize that money is actually flowing, hence the term “cash flow”. I learned that money is never lost, it is just transferred from one person to another. The only question is, is money flowing to you? or is money flowing out of you? As for finance charges, it is money flowing from your wallet to the credit card company. 🙂

I’d really love to learn more about finances and minimize my confusion. It is my hope that sharing my own experiences with money will also help clear the confusion among others.

A few years ago, I got into credit card debt. I can still remember the frustration I went through, barely being able to pay the minimum amount due for my credit card. Giving away a chunk of my paycheck every month to pay my credit card debt but could not seem to make a dent into the very huge balance. I was foolish then. I got my first job. I also got my first credit card. As they say, the fool and his money are soon parted.

1) If you realized you’ve dug yourself a hole, stop digging.

Stop using your credit card. Leave it at home. When I realized I was heavily in debt with my credit card. I no longer wanted to use it. Unfortunately, I had no choice but to use it in case of emergency. Unfortunately for me, every month seemed like an emergency. For a few times, I even had to use my credit card for cash advance from an ATM to pay for my house rent. It was depressing just going to the bank to do a cash advance. When I glanced at the hefty cash advance fee, I could only swallow my pride and promised myself never to let this happen again.

That experience left a bitter memory to me even up to this day. Today, I don’t use a credit card. I could easily apply for one if I want to, but I don’t want to ever experience that painful feeling of being a slave of the bank again.

2) Use a debit card instead

If you cannot use your credit card, how should you pay then? The simple answer is, debit card. The next best thing to use for paying your grocery, or gas, or even shopping to the mall is a debit card. Using a debit card is like carrying a huge amount of cash (or at least enough to pay for what you are buying) WITHOUT the extra weight. Debit card is as good as cash. No cold hard cash to carry around. It is safe. It is convenient.

The good thing about debit cards is that you don’t have to worry about not paying your balance each month. You won’t be charged any interest like credit cards. But watch out! When you go over your checking account’s minimum balance, you can be charged a fee.

Another drawback of using your debit card is that it is very hard to dispute a transaction you made. The bank assumes that since you manually entered your PIN (Personal Identification Number) when using your debit card, it is really YOU who is doing the transaction. In which case, you have to take responsibility for any purchase on your debit card. So be careful. Better keep your receipts and counter check it against the transactions on yout debit card statement. And NEVER tell your PIN to anyone.

3) Use cash

In some parts of Asia, most people are still using cash. You can go out with nothing but cash on hand, no credit card, no debit card. In fact, in some cases, it might be the ONLY choice you have.

Sometimes even if you can use your credit card to make a purchase, it could still be an inconvenience compared to cash. Some merchants charge an additional 1 to 2% fee or require a minimum purchase amount in order to use the credit card. It’s ironic, isn’t it? Shouldn’t it be more convenient and cheaper to use credit card instead of cash? Since you’re basically paying with electronic money (which is just an idea) and not a physical money like bills or coins, the cost should be considerably less. I guess the only convenience you can get for using the credit card is not having to worry about being robbed with a gun.

4) Setup an auto-payment scheme for your credit card

Ok. So you’ve stopped using your credit card and most of the time, you’re trouble free. But sometimes, you REALLY, REALLY need to use it. Hence, you have a balance at the end of the month. What if you forget to pay the balance? Then your balance would accrue interest. What if you did not use your credit card for a few months and didn’t know you had a balance before? Then you’re in bigger trouble as the balance is being compounded and your credit rating may also be hit very badly.

So, a wise thing to setup is a credit card auto-payment feature. You can call up your local bank and ask to have your credit card auto-paid using your current/checking/savings account. Of course, you still need to make sure that your account has sufficient balance to pay-off the credit card. Otherwise, you might run into more problems.

Using your credit card, is OK, as long as you are able to pay the whole balance at the end of the month. This way, you only pay for money you actually used, with NO interest. That’s what I call INTEREST FREE. 🙂

5) Cut up your unused credit cards – More is NOT necessarily better.

Once you’ve paid up you credit card balance and setup the auto-payment facility with your current account so that you always pay the balance every month, you need to ask yourself whether you really need ALL the credit cards you have. Do you really need that 8th credit card you just received in the mail? Note that MORE may not necessarily be better. Even if you rarely use the cards and may not even have any balance at all on those cards, it could still be hurting your credit rating as the extra credit is under utilized.

Or perhaps you only have 1 or 2 credit cards with you but another credit card is more suitable to your needs. For example, you travel a lot, so it makes sense to get a card that offers cash back rewards for every purchase you made on petrol.

A credit card is a double-edged sword. As with anything in life, you need to understand what you are getting and what you have to pay for. For a credit card, this means, you GET an extra money or credit to buy what you want. But in the end, it is still borrowed money, and you have to PAY for it one way or another.