How to use your credit card without owing a pound of flesh

A credit card can be your friend in need or a Shylock-like foe in the making, depending on how wisely you handle it. 

While some go broke using credit cards, others use it as a tool to float their head above troubled waters in times of crisis. Using a credit card smartly can help you build a strong credit history, earn rewards, and avoid debt. 

"It empowers me. In a city like Dhaka, I cannot take a loan from someone instantly, but a credit card helps me in such critical situations," said Asif Mahmud, a development worker who promotes the smart use of credit cards.  

"I paid my semester fees using my credit card and then paid it off in monthly instalments. I might have had to pay some interest, but I didn't need to pay the full amount at once, which wasn't possible for me at that time," he added. 

Asif and some other credit card users shared their top tips about using a credit card smartly. 

1. Avoid yearly charges: Some banks waive annual credit card fees based on usage. For instance, EBL exempts the fee if you make 24 transactions in a year. Shahriar Zaman, who has been using credit cards for 10 years without paying yearly fees, said, "The bank required 18 transactions per year to avoid the fee. So, even if I had cash, I used my credit card to purchase things to fill the quota and then paid it off from my bank account."

2. Pay your balance in full every month: Avoid paying only the minimum amount due; pay off the entire balance by the due date to avoid high-interest charges. This improves your credit score.  Asif said, "A credit card is a very good financial tool, but you have to be committed to paying on time." Sazzadul Islam, a private university professor also seconds this notion, saying, "It's important to avoid paying interest on credit cards, and there's only one way to do that: paying off the debt within the same cycle you take it."

3. Use it for planned purchases: Only use your credit card for purchases you can afford to pay off immediately. Treat your credit card as a tool for convenience, not a way to extend your budget. Sazzadul reminded, "While purchasing with the card, don't ever forget that it's a loan."

4. Take advantage of rewards: Choose a credit card that offers rewards like cashback, travel points, or discounts in categories you frequently spend on. Make sure to redeem these rewards regularly. 

"Some cards offer discounts at local supermarkets or cashback on utility bill payments, which can be very useful for the average Bangladeshi consumer," said a private bank representative.

5. Go over your instalment: Asif suggests, "You should pay at least double the minimum payment.  For example, if I borrow Tk45,000, my monthly instalment comes to Tk2,500. I should pay Tk5,000 each month. This way, I can close the debt in eight months, but if I pay Tk10,000 each month, I'll finish it even sooner. The sooner you pay off the debt, the less interest you pay."  

6. The 30% rule: The rule of thumb is to keep your credit utilisation below 30% of your available credit limit to maintain a good credit score. For example, if your credit limit is Tk50,000, try not to spend more than Tk15,000 in a billing cycle.

7. Avoid cash advances: Cash advances usually come with higher interest rates and no grace period, which means interest starts accruing immediately. Use them only in emergencies. 

"I follow two main rules," said Asif. "First, I don't spend money I don't have or can't afford, and second, I don't withdraw cash from an ATM using a credit card. Instead, if I need cash, I transfer the money from my credit card to my bank account or bKash and withdraw from there." 

8. Set up payment reminders: Use reminders or auto-pay features to ensure you never miss a payment, which can lead to late fees and negatively impact your credit score. "I plan it on Google Calendar so that I don't miss the dates of different payments, including my electricity bill, insurance bill, and credit card bill," said Sazzadul. 

9. Don't have too many cards: Applying for too many credit cards in a short period can negatively impact your credit score. A private bank representative suggests, "Stick to one or two that offer the best benefits and are easy to manage."

10. Read the fine print: Understand the terms and conditions of your credit card, including how interest is calculated and any promotional offers. This will help you make informed decisions. For those following Islamic financial principles, several banks in Bangladesh offer Shariah-compliant credit cards.

"Islamic credit cards, which operate on a fee-based system rather than interest, are an option for those who want to use credit cards in compliance with their religious beliefs," notes Abdul Hannan, a  Shariah-compliant credit card user.

By using these strategies, you can maximise the benefits of your credit card while avoiding the pitfalls of debt.