MANILA – Looking back on the crazy ride we all had in 2020 – and not just the COVID-19 pandemic but also the eruption of Taal Volcano and back-to-back super typhoons – there are a few good things we can be grateful for.
One of them was being shielded from the temptation of impulse shopping on our weekend visits to the malls or being lured by midnight sales.
Life in lockdown and working from home set-ups have meant less spending on clothes for most of us and that includes cosmetics, fragrance, shoes, bags, or we can just throw in the whole fashion and beauty industry. Dining out, another expense item that not everyone can afford and yet splurges on, disappeared from most people’s spending list for many months this year.
With a lot less opportunity to spend, I have counseled family and friends to give up their credit cards. If you are not even using one-fourth or one-half of your credit limit on one card, what’s the point of owning 2 or 3 or 4? Even if they all come with waived annual fees, there is no reason to hang on to more than you need, and court temptation when life resets and COVID-19 infections are under control.
This time of the year, in anticipation of holiday shopping and to push consumers to spend, credit card companies are aggressively offering increases on credit card limits. If you’ve been a good customer – that is you always pay on or before the due date – you are likely on your credit card company’s target list.
Before you say yes, here are some things to consider.
#1 Do you know your total credit limit?
Not everyone knows how much their credit limit is exactly, especially if they don’t spend anywhere near it. If you own more than one card, place all your statements side by side and tally them up. The sum is your total credit limit – which may surprise you – and you have to seriously consider if you need more.
#2 Now check how much you’ve been spending for 3 to 6 months.
How much was your bill with Credit Card A? And if you have more than one plastic, check the bills for Credit Card B and C, and even D. A good rule of thumb is to get a three-month average for a better idea of how much credit line you really need. If you can go back six months, even better. What you discover will help you decide whether to say yes, or no.
#3 When to say Yes, and when to say No.
If you have been spending less than half of your total credit limit, you don’t need more credit line. In fact, you should consider giving up one or two of your credit cards. Even if you’ve been spending 50 to 70 percent of your total credit line, you can still say No as you have a comfortable buffer for emergencies. But, if you are hitting between 80 to 90 percent, saying yes may be a good thing so you don’t get slapped with over limit fees (yes, there is such a thing. When you spend beyond your credit line, your credit card issuer may approve the transaction but charge you a flat rate or percentage of purchase or excess).
#4 Is there a risk to saying Yes?
One obvious risk is your credit exposure. If you lose a credit card and it is used by fraudsters, you could be liable to pay for all the unauthorized spending. Imagine if you lose two or three credit cards, that’s easily double or triple the heartache. And these days, fraudsters do not even need your actual credit card to steal your identity and go on a shopping spree charged to you.
#5 Why am I being offered a credit line increase?
Credit card companies generally look at your monthly income and then multiply by a certain factor say 2 or 3 or 4 when assigning your credit limit when you applied for the card. After that, they monitor your payment behavior. Do you pay in full, on time, or pay a fraction and revolve? They like it best when you pay on time, and when you pay only the minimum due as that’s when interest charges kick in and they make more money from your growing unpaid balance.
#6 Is there a formula to know the credit limit I need?
There’s no one size fits all answer here. A working formula is to take the six-month average of your monthly income and your monthly spending. A comfortable credit line should be double the average of your monthly income or monthly spending, whichever is higher. And just in case the latter is higher, note this is a warning sign for your spending behavior.
#7 What about a formula on how much I can spend?
The best rule of thumb is to spend less than what you make, which means your credit limit should be something your income can cover with room for savings too. Market research on consumers who fell into debt traps showed that they wrongly assumed they can spend the sum of their income and their credit limit. This is just wrong. In fact you should not be spending all your income, nor maxing out your credit limit, let alone do both.
Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.
Aneth Ng Lim, Paying It Forward, featured blog, blogroll, financial literacy, financial education, blogroll, featured blog, savings, credit card, spending