For some people, credit cards are the only financial support they have left in an emergency. It is not always possible to be disciplined in a financial crisis.
Discipline is what we are taught from day one when it comes to making good use of our credit cards. Credit cards are our financial friends, and we can use them according to our situations and circumstances. For some people, credit cards are the only financial support they have left in an emergency. It is not always possible to be disciplined in a financial crisis.
Here are some credit card disciplines you can ignore in an emergency.
Pay more than the minimum amount due
Credit card companies give you the option of paying the minimum amount due or more than that by the due date. Failure to pay an amount equal to or greater than the minimum amount due by the due date may result in penalty charges by the card company. The minimum amount due consists of interest on the unpaid amount and a small amount towards the principal part. Often the minimum amount due is 5% of the total outstanding invoice, but this can vary from company to company. So if you make a habit of only paying the minimum amount due each month, it will take you a long time to clear credit card debt.
However, only paying the minimum amount due during an emergency can help you focus on things that are much higher on your list of priorities. In a normal situation, your priority might be to pay the credit card bill in full; however, in an emergency, the priority may shift to things like paying for groceries, medications, etc. Paying only the minimum amount due on your card can provide temporary relief and help you avoid penalties. Also, banks will not classify your payment as a default. You can aggressively pay off your outstanding credit card amount once you get out of the emergency and after you regain financial comfort.
Not exceed 30% of the level of the credit utilization ratio
It is generally recommended that a credit card user keep the Credit Utilization Rate (CUR) below 30% for a better credit score. This can lead to a negative credit score if the card user often exhausts the card limit, resulting in a high CUR. It is important to note here that exceeding the credit utilization ratio from time to time does not have an immediate impact on the credit rating. So if you are in an emergency situation and you have no other option to pay for essential expenses such as groceries, house rent, etc., then you can exceed the 30% CUR . Once your financial situation improves, you can lower the CUR, and gradually your credit score will also improve. If you think your liquidity situation won’t improve soon, you can look to expand your credit options. You can ask your existing credit card company to increase the spending limit, or you can apply for new credit cards. Increasing credit options and spreading your spending across different credit instruments can help bring the CUR down below the 30% level.
READ ALSO | Banks are raising FD rates: Tips for seniors to maximize investment returns
Do not withdraw money from your credit cards
Besides swiping a credit card at malls or buying things online, you can also use your credit card to withdraw cash. It gives you instant access to cash when you manage some sort of fund. It’s like your contingency fund to deal with a serious emergency like paying the hospital bill or buying medicine.
Ideally it is advisable to use this option only when you really need the money, but in an emergency we can use this option and withdraw money according to the credit card limit. After getting out of your emergency, you can plan ways to pay off credit card debt quickly to avoid high interest payments. This is because interest on cash withdrawals applies immediately, without the normal interest-free period for other types of credit card transactions.
Do not convert reward points to cash
Credit card companies offer lucrative options to redeem reward points when you use them for things like booking travel tickets, hotel rooms, and more. However, if you redeem the reward points for cash, you may not get the best value. . So generally it’s not a good idea to convert reward points to cash. However, in times of financial stress, you cannot think of going on vacation. So here you can skip the normal guidelines and convert points to cash if that helps.
Don’t Stress Your Credit Score
Paying your credit card bill late, running out of credit limit, applying for too many credit cards, etc. can put a strain on your credit score. Credit score is very important, but it shouldn’t stop you from accessing credit when you need it most. Thus, you should give priority to paying the medical bill, etc. rather than maintaining a high credit score when you’re in deep financial crisis. You can rebuild the credit score in the future when you regain your financial strength.
A rule of thumb is that you must be very careful before knowingly breaking these credit card disciplines. Try not to go overboard and re-establish credit card disciplines as soon as things improve.
(The author is CEO, BankBazaar.com)