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How to use a credit card – the financially prudent way

Do you know how a credit card should be used? Do you know how you can avail of the credit facility, while incurring no expense?

Do you know that you can borrow money using a credit card without paying any interest? Yes, interest free!

Read on to find out the right method of using a credit card.

You know what a credit card is, and you know how it works.

(Please read “Understanding Credit Cards – The Basics” and “Credit Cards – Beyond the Basics” to know more about credit cards)

Well, you even have a credit card. In fact, you might have multiple credit cards.

So, how do you use your cards?

Do you purchase to your heart’s content, and just pay the minimum – while rolling over the remaining sum to the next statement period?

Do you reach the credit limit of your credit card, and transfer the balance to another card offering a lower rate of interest?

If the answer to these questions is yes, you could be in a debt trap. Beware – these are not the best ways of using a credit card!

Let’s see how a credit card should be used in order to avail of all the benefits, while still not bearing any costs. That is, let’s learn to use credit cards without paying any interest!

Pay the full outstanding balance – not just the minimum amount due

The first and the most important thing to bear in mind is that you should pay the entire amount due, and not just the minimum amount due.

How do you think credit card companies make money? Through annual fees? No!

The card companies make the most money by charging you an interest on the borrowed amount. And the interest is hefty – anywhere from 24% to 42% per year.

Yes, credit card loans are the costliest. So, why take the most expensive loan?

(Yes, the amount you spend using the credit card is a loan. Please read “Understanding Credit Cards – The Basics” to know more)

And the problem is, when you roll over credit like this, you have to pay this interest on all the purchases in the next statement cycle too! Yes, you don’t get any grace period in this case, and you start paying interest on such purchases from the date of purchase itself.

(Please see the example at the bottom of this article to understand this better)

Therefore, please pay the full outstanding amount every statement period.

In fact, if you cannot arrange for funds to pay the entire amount due, it would be much better to take a personal loan and pay the credit card balance in full. After all, a personal loan costs about 15% per year – just a fraction of the cost of a credit card loan!

Another option is to break a fixed deposit (FD) and repay the credit card amount. After all, what is the point in earning 8% to 12% a year on an FD when you are paying 24% to 42% a year for credit card debt?

Do anything to arrange for funds, but the bottom line is – pay the entire outstanding balance in every statement cycle.

Do not transfer the balance

This flows from the first point – when you transfer the balance to another card, you are not paying back anything. You are just shifting your liability from one card to another.

You would still be paying an interest for the balance on the new card. Why do that? Pay the amount in full instead!

Do not withdraw cash

This is also for the same reason as the first point – if you use the credit card to withdraw cash from ATMs, you have to pay the heavy interest on such withdrawals from the same day! You do not get any grace period for cash withdrawals.

Pay on time

If you make the payment after the due date, you would be charged a late payment fee. So, pay your dues before the due date.

In fact, try to make the payment at least two working days before the due date, as payments take upto two days to clear and reach the credit card company.

This is applicable irrespective of whether you are paying the minimum amount due or the full balance.

Opt for cards that are “lifetime free”

Another cost that you incur on credit cards is the “annual fee”.

Most cards waive off the annual fee for the first year in order to attract new customers. But many companies also offer credit cards that have no annual fee ever.

These are popularly known as “lifetime free” credit cards. Opt for these as far as possible so that you don’t have to pay the recurring, yearly fee.

An example of correct usage of a credit card

Let’s say your statement period is from 15th of every month to the 14th of the following month.

You make a purchase of Rs. 1,000 on 16th June, and another purchase of Rs. 3,000 on 2nd July. This statement period ends on 14th July. You would get the statement for this cycle around 18th July, and the due date would be around 5th August.

Let’s say the minimum amount due is Rs. 200, and the total outstanding amount is Rs. 4,000. Your rate of interest is 30% per annum.

Now if you pay the minimum amount due, you would be rolling over Rs. 3,800 to the next statement period.

Thus, you would be paying an interest of 30% per year (or 2.5% per month) on Rs. 3,800. Also, if you make any further purchases (say, on 25th July), you would be paying 30% p.a. interest on this amount right from 25th July!

This is expensive!

Instead, if you pay the total outstanding amount on 3rd August, you would have repaid your total balance. And you would not be charged any interest for the amount you borrowed!

So, for purchases on 16th June and 2nd July, you can make the payment on 3rd August without paying any interest!

And that is not all – you would get the full grace period for purchases made in the next statement cycle.

Thus, for all purchases made between 15th July and 14th August, you would not pay any interest if you make the full payment till 3rd September!

You can keep making full payments, and enjoy interest free credit perpetually!


Pay the entire outstanding amount on your credit card every statement period, and enjoy interest free credit forever!

Happy spending…

To find out how credit cards work and to understand the basic terms associated with it, please read “Understanding Credit Cards – The Basics”.

To learn about some advanced terms regarding credit cards, please read “Credit Cards – Beyond the Basics”.

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