When the bill arrives, you have two choices—to rummage through an overstuffed wallet for the right combination of notes and coins, or to flash your credit card in style. But there are many more benefits of using a credit card. This little piece of plastic has the power to let you spend money you don’t have—which, in the wrong hands, will ruin you.
It pays to understand the benefits of using a credit card and how your credit limit is determined, so you can use your cards wisely and effectively.
So what exactly are the benefits of using a credit card?
Before we begin, remember that the word “benefit” should be taken with a pinch of salt. What is beneficial to a smart, savvy spender could be a ticket to bankruptcy for someone with no self-control. You have been warned.
Now that that’s been said, there are many reasons to use credit cards. The most obvious is the convenience of not having to carry around thick wads of cash and purses jingling with coins, no matter how much you need to spend. What’s more, if you urgently need to pay for something and don’t have the cash on hand just yet, you can “borrow” from the bank the money you need.
But that’s not all. Here are some of the other benefits credit card users enjoy.
- It is easier to monitor your finances: Ever gotten to the end of the month and wondered where all your money went? If you paid exclusively by credit card, you wouldn’t have this problem. All spending made on credit cards is tracked by your bank or Financial Institution (FI), and any suspicious-looking charges can be disputed.You can view all expenditure on your statement at the end of the month, or even in the middle of the month using online banking. If you’re the forgetful sort, many banks and FIs let you opt to receive SMS or email reminders to pay your bills so you can avoid late payment penalties and interest.
- You can improve your credit history: Using credit cards wisely—by paying your bills on time and mostly in full—you build a positive credit history which will make it easier to get hefty loans, such as for property. Of course, irresponsible credit card use will do the opposite and wreck your credit score.
- You enjoy rewards, air miles, cashback and discounts – Credit cards often reward users with benefits that include cashback on your spending, frequent flyer miles and rewards points that can be exchanged for freebies. Many cards offer cashback and discounts in certain spending categories, such as petrol and groceries.
- You can travel without worrying about having to carry around large amounts of cash – Not only do credit cards enable you to pay for things overseas without having to resort to cash, some cards also offer free travel insurance when you use them to book your trips.What’s more, if you’re unlucky enough to get robbed while on holiday, you simply have to cancel your card, file a report with the police and then dispute any charges that have arisen from the wrongful use of your card. That is certainly preferable to getting cash stolen.
What is a credit limit and how is yours calculated?
Banks and FIs aren’t going to lend you an unlimited amount of money through your credit card–well, not unless you’re a high-net-worth individual they’ve deemed worthy of an unlimited spending limit.
Each time they issue you a credit card, they’ll determine a credit limit based on your monthly / annual income that will indicate the maximum you can charge to the card.
In Hong Kong, the factors that inform your credit limit vary from bank to bank, but typically are assessed based on:
- Your monthly / annual income
- Current outstanding debts or liabilities such as
- Mortgage loans
- Car loans
- Debt from other credit cards
- Student loans
It’s worth noting that the above is just a very general example of how a bank or FI might go about calculating your credit limit. Each bank or FI has their own method of assessing how much they’re willing to lend you.
And for those who’ve applied for multiple cards, if you already have credit cards with four or more FIs or banks, you might be granted a credit limit up to just 1.5 times your monthly income, unless you already have a savings account with the bank or FI in question.
This is a precautionary measure to discourage you from using too much credit.