Using a credit card for your day-to-day expenses offers many benefits. Loyalty points, the ability to make large purchases, buy now pay later, and more. Managing your credit card payments can become a significant challenge, especially when you have a low income and tight budgets. In this guide, credit experts from CreditMantri share tips on managing a credit card on a low income to avoid the dreaded credit card debt trap.
Be Smart in Managing your Credit Card Payments
A credit card is an excellent financial tool. When used right, it can help build your credit score, making it easy to secure the best interest rates on bigger loans in the future: home loan, car loan, etc. However, if you don’t handle it the right way – it can lead to a mountain of debt that you’ll have to repay for years.
This is especially true when your income is limited. With a low income, the limit available on your credit card is likely to be small. This is because the income you earn plays a crucial deciding factor in determining card eligibility and the sanctioned credit limit on your card.
So, if you’re finding it challenging to stay within the credit limit offered on your card, worry not. Continue reading to find out expert card management tips for credit cardholders with a low income. Use the tips listed here to guide you along the right path and manage your card effortlessly.
01 Learn How to Use Credit Cards Responsibly
Irrespective of whether your card comes with a high credit limit or a low limit, the first thing you’ll have to learn is how to use it properly. Credit cards have several advantages: they help you build your credit history, earn reward points, more secure than using cash, etc.
But, you can enjoy all these benefits only when you use your credit cards responsibly. The golden rules to follow are:
- Pay your credit card bills on time before the due date. This way, you’re not charged the steep interest rates for late payments.
- Besides saving on the late fees, on-time payment also boosts your credit score, as payment history is the biggest factor in determining your credit score.
02 Fix the Card Budget & Stay within It
Your card may have a credit limit of Rs. 25,000. That doesn’t mean you get a free pass to spend the whole limit of Rs. 25,000 every month on it.
The basic principle of responsible credit card management is, “Don’t use your credit card for frivolous purchases outside your means. Instead, use it to buy only what you need and not what you want.”
Set a budget for your credit card every month. This budget must be decided based on your ability to pay back. For example, if you can comfortably spare Rs. 10,000 every month for credit card bills, then this is the upper limit you have to fix as your card budget. Use your card for purchases only to this limit. Note that though the available credit limit on the card may be higher, don’t be tempted to spend beyond your budget, as it could lead to pending bills and debt traps.
03 Keep Track of Card Spends
Fixing the credit card budget is the first step. After you have set the monthly budget, the next step is to track all your expenses, to ensure that you don’t go beyond your budget. You can track your card spends easily using the mobile app of your credit card company/bank that issued the card.
Once you’ve reached your monthly budget, do not use your credit card for other purchases until you have paid off the pending balances. This may seem difficult to follow at first. However, being disciplined with credit card usage can help you build a good credit history over time while helping you avoid becoming a victim to credit card debt.
04 Use as Little of your Credit Limit as Possible
It may be tempting to max out your credit card, i.e. use it till you exhaust the available credit limit. However, you must avoid doing this. Maxing out the available credit limit can increase credit utilisation, one of the biggest factors determining your credit score.
The credit utilisation is the ratio of how much credit you have used to the total available credit limit. When you exhaust the available credit limit on your card, it not only increases your credit card bill but damages your credit score as well. So, as mentioned above, set a credit card budget (ideally 30% or lower than the available credit limit) and use your card only for purchases up to this limit.
05 Pay your Bill in Full Every Month
Your credit card company may require you to pay only the minimum payment (a percentage of the outstanding balance) every month. While this may seem like a great way to reduce your bill payments, it becomes costly and a huge mistake over time.
When you pay only the minimum, you will be charged interest on the pending balance, which keeps on increasing every month. So, to avoid the steep interest rates, you need to settle your credit card bills in full every month.
06 Set up Automatic Payments
Paying your credit card bills on time may be challenging, especially if you have multiple other work and family commitments. The easiest way to avoid missing a bill payment is to schedule automatic payments. This way, the credit card bill amount is debited automatically from your linked bank account on a specific date every month. This avoids missed payments and damages to your credit score.
07 Ensure Maximum Utilisation of Credit Card Reward Points
All credit cards come with loyalty points, rewards, discounts and other perks. Make sure to understand the rewards program offered with your card to utilise it to the maximum. For example, if your card provides extra cashback on fuel purchases, make sure to use the card every time you fuel your car or bike.
Similarly, ensure that you redeem your points before they expire. Check if you can use the reward points to pay your credit card bills or else redeem it on other spends like groceries, travel, etc.
08 Don’t Miss Out on the Extra Perks offered on your Card
Besides the reward points, credit cards offer other added perks like waived baggage fees, lounge access, complimentary movie tickets, discounts on dining at specific restaurants, etc. Go through the benefits provided on the card and try to use the extra perks offered on it.
09 Make use of the Credit Card App to Monitor Card Activity
Managing your credit card is easier than ever before, thanks to handy mobile apps. You can log into the mobile app to view the outstanding balance on your card, check the available credit limit, pay bills, track spends, report a missing card, follow the rewards earned and more. This way, you can manage your credit card quickly with just a few taps on your mobile screen. Monitoring your credit card activity regularly helps you avoid nasty surprises at the end of the month when you receive the bill.
10 Finally, Improve your Fiscal Habits
Irrespective of whether you earn a low income or a huge salary, you need to improve your spending habits. Make sure that your spending is in line with your monthly budget. Try to use money-saving techniques like maximising credit card rewards, using coupons, discounts, etc., to save more money every month.
Taking the time to understand your spending habits and cutting down unnecessary expenses will help you in the long run. Over time, with responsible usage of your credit card, you can increase the available credit limit and build a good credit history.