For those caught in the trap of paying off just the minimum balance, credit cards are one of the most expensive ways of borrowing – and one of the quickest ways to fall into debt. But there are ways to make flashing the plastic work for you. Here are Benchmark’s top five tips on making credit cards pay, rather than letting them break the bank.
Pay it off!
Let’s get the obvious point out the way: If you don’t pay off your monthly credit-card balance in full, you’ll likely be charged top dollar. Preeti Bhambri, founder of personal finance website MoneyCamel.com, advises people use credit cards more like debit cards – paying off the balance monthly, thus accumulating no interest, but racking up rewards such as air miles or discounts. “Used judiciously, credit cards can lead to significant savings,” she said.
Choose your rewards wisely
To best work the system, you’ll need to choose the rewards that are right for you. Different UAE card providers offer various benefits, ranging from cashback cards – where you get a small proportion of your spending back – and those that offer air miles, cinema tickets, valet parking, dining or golf rewards. If you’re a big spender, a cashback card might be the most rewarding. But if you don’t use your credit card much, perks like free airport-lounge access might be the way to fly.
There is a dizzying array of cards out there, so use a comparison site before signing up. For example, Souqalmal.com lists more than 200 UAE credit cards, with monthly interest rates ranging from around 0.54% to 3.33%. There are of course additional factors to consider, such as the annual fee, foreign-exchange rate and minimum salary required. Those working the system will choose a credit card with zero fees and the best rewards; these may have a higher interest rate, however, so always remember tip number one.
Know the difference between Islamic and conventional cards
If you are comparing UAE credit cards, you’ll see that a number of Islamic alternatives are available. Sometimes known as ‘covered cards’, these products do not charge interest, something not permissible under sharia principles. Instead, such cards have a service charge or non-compounding profit rate. When comparing such cards, bear in mind the fees – which can vary between Dh75 and Dh1,200 a month, according to Souqalmal.com.
Be wary of cash withdrawals
Using your credit card to withdraw cash generally attracts two additional fees: A charge of a few percent of the sum you withdraw, and a higher interest rate than that levied on store purchases. According to data from Souqalmal.com, you’ll typically be charged a 3% cash-advance fee – amounting to $60 on a $2,000 withdrawal – plus a higher monthly interest rate of around 3%. And if you’re abroad an overseas transaction fee of 2.75% may apply. So remember: Financial pros never use credit cards to withdraw cash.