There is always a price that you have to pay when you borrow money.

If you want to save, you may want to refrain from this option. However, this is virtually impossible in the dynamic world that we live in. When you need to spend cash now, but you do not have it, you will resort to borrowing. The reality is that it is not dangerous as long as you plan the repayment and remain disciplined about it. Learn how to borrow effectively and safely with the use of credit cards.

The Primary Credit Options

All credit products fall into either one of two major categories depending on the repayment term.
Let's take a closer look at these categories.

Short to mid term credit - Most unsecured loans and credit lines are in this group. These include personal loans, credit cards, overdrafts, store cards, car loans and in-store finance products.

Long term credit - Home loans, home equity loans and debt consolidation loans belong to this category. The repayment term is longer because these loans are quite large and because they are secured with an asset, which is the house of the borrower. You can select from a wide variety of secured loans in New Zealand. It is also possible for large unsecured loans to have a longer repayment term, but these are not frequently found.

How Credit Cards Work

Credit cards enable you to use short-term unsecured credit conveniently. You do not have to place an asset as security in order to obtain a card. The lender will approve you based on the income which you earn as you will use it to repay your debt.

Credit cards work in the same fashion as traditional overdrafts, but they are more practical and often more affordable to use. You can spend money up to a predetermined limit. You have the opportunity to pay back what you owe without incurring interest within a set period. You do not have to make the whole payment, however. You can pay back only the required minimum amount. After the interest-free period expires, the lender will charge interest on the outstanding balance.

The credit cards are designed to help you pay for small to medium purchases. You should try not to spend more than a third of your limit every month. Borrowing several hundred dollars is perfectly acceptable, but spending a few thousand is certainly not wise. In some cases, when you plan things in advance, you can use a card for making a bigger purchase such as a flat-screen TV or new living room furniture. Generally, every time you borrow money, you have to plan how you will pay it back.

The Right Credit Cards

You can select from a huge variety of credit cards in New Zealand so comparison shopping is certainly an effective strategy for getting the best one for you. Ideally, the card should have low interest rate, low fees and charges and a long repayment term. In general, credit cards tend to have some of the highest interest rates so it makes sense for you to have a good credit record when you apply. That way, you can secure a lower interest rate. Once you find the right card, you have to read the agreement carefully before signing it.

Store cards are attractive because they are easy to get, but they tend to be more expensive than the credit cards from banks. If you consider getting such a card, you should look for one which has affordable interest rate and a longer repayment term. Again, comparison shopping will help you find the best deal.

How to Use Credit Cards

Credit cards should not be used for repaying debt as they have some of the highest interest rates. You will only get into more debt if you transfer balances to a facility with higher interest. Debt problems are best resolved with the expert assistance of a debt counsellor and possible a debt consolidation loan.

You can have more than one card if the fixed cost is acceptable. You can make the most out of the cards by using only the ones with the most favourable repayment terms regularly. You can set the others aside to use only for emergencies.

It is best if you avoid buying luxuries with your credit cards. This is because you will be at greater risk of getting into debt when you borrow more. If you want to buy a more expensive product, you should consider a store card with longer repayment term or in-store finance with comes at a lower interest rate.

A higher credit card limit is often offered as a reward to loyal and reliable customers. Before you accept such an offer, you should check whether there are additional charges and requirements associated with it. You should not use the higher limit as an excuse for spending more, however.

Even though it may seem convenient, the transfer of your monthly salary to your credit card account typically comes with extra charges which leave you with less income. It is wiser to transfer your salary to an account which earns a good interest.

Credit cards are not suitable for debt consolidation because of the higher interest rates which they come with. You should use a specially designed debt consolidation loan for this purpose.

You should avoid using credit cards for paying high fixed expenses such as tuition fees. A student loan or even a traditional unsecured loan is usually a much more affordable and practical solution because of the lower interest rate and the longer repayment term.

Finally, you should always prefer cash payments over credit cards. Why worry about interest payments when you have enough money to spend now?