The other day I saw an interesting Tedx Talk by a fellow called Preet Banerjee, where he was speaking about how the term debt has changed in its connotations. He believes that we have to revert to the culture of hating debt again, specifically debt obtained to buy stuff that depreciates in value. Although I strongly agree with this, it would be very naïve of anyone to ignore the fact that we live in a world that is run by credit. Before you can get credit to buy things that appreciate in value and are worth buying (e.g. property), you first have to prove that you are faithful in handling credit from buying things that are either consumables or whose value takes a deep dive the moment you get the receipt from the salesperson.
In light of this credit cards can be a gift to the earth if one knows how to use them correctly. By this I mean one can leverage credit card debt such that the benefits to you exceed the negatives. I mean if living as an adult will ultimately require that I own one, I want to know how I can get the best out of owning this little piece debt-making, often broke-inducing, potentially life-wrecking plastic card without getting indebted, broke or having my young precious life wrecked.
Below are 5 key benefits of owning credit cards (other than instant gratification). The benefits of interest are those that would assist me in one way or another in getting richer and not poorer.
1. Negotiating power
So, if you are faithful in paying off your credit card on time and earn yourself a good credit score, this can allow you to negotiate a lower interest rate on a mortgage loan. This is beneficial if you would like to invest in real estate, since a lower interest may mean a bigger profit margin for you since your repayments to the bank are lower.
2. Rewards
Credit cards offer numerous rewards, such as earning a specific percentage of the purchase amount back when you swipe your credit card. This is typically between 1% and 10% depending on the product bought, service acquired or affiliate company at which the credit card was used. These credit cards can also score you discounts of up to 25% on purchases at selected retail partners. Certain credit card companies give you points each time you swipe which you can later use to book flights, both domestic and international (did somebody say free holiday :-D?!)
3. Buying things online at a lower cost
If you are a cheapo like me this will totally appeal to you. Credit cards allow the purchase of items at a significantly lower price, even from different parts of the world at a significantly lower price. This is always welcome.
4. Convenience
This is especially applicable for travel. Using a credit card whilst travelling overseas offers a great deal of convenience for ease of purchase of items across currencies without having to withdraw large amounts of cash in one currency and exchanging it into another currency (usually at exorbitant rates) prior to departure. Some credit cards do not charge large rates for the currency conversion per transaction (usually 2%-4%), but one can even get credit cards that have no foreign transaction fees.
5. Protections and Insurance on purchases
If by any unfortunate event, you spot fraudulent activity on your credit card, there’s a term called zero liability, which means that you are not responsible for fraudulent charges when you report them promptly. Credit cards can also act as a form of insurance on purchases since they allow you the right to dispute purchases with merchants for unsatisfactory products or services, a privilege one would not have if they acquired the products/services using cash.
Although they may have all these benefits, by-and-large credit cards are still like taking out a loan, and therefore if you do not pay your card balance off in full you pay interest. In the words of my new Tedx hero, Banerjee: “This means that you have to pay back more money than you borrowed. Who’s paying for that difference? You are. Therefore when you borrow money…you’re actually borrowing money from your future self.” So below are some strategies that one can employ to get maximum benefits without incurring all the costs from owning a credit card:
Pay it off during the grace period
The secret to not paying pack not more than you borrowed is to find out what the grace period of a credit card is from the time of purchase before the interest begins accruing, and making sure that you have the means to pay your credit card off within that grace period. This would mean that you borrowed money at essentially 0% interest, which is pretty cool! The grace period only applies if you do not carry balances month to month however, so this is only effective if you start on a clean slate, and keep it clean.
Moving your due date and paying mid cycle
This can help if you are not starting on a clean slate, or if you happen to have a credit balance carried over. Usually the credit balances that appear on your credit card statement are based on your balance at the end of your billing cycle, and not after you have paid the bill off. You can therefore negotiate to move your payment due date to one that works best for you according to your income cycle so as to ensure that you can make a payment a few days before the billing cycle ends- so the balance that gets reported is lower. With this you may still incur interest on the outstanding amount but the benefit is it helps in boosting your credit score.
Use the 20-10 rule of thumb when setting your credit card limit
This rule of thumb assists in determining how much credit you can afford, and basically means that you should avoid 20% of your net annual income on all of your loans (excluding mortgage) and that payments on those loans shouldn’t exceed 10% of your monthly net income. Setting a credit card limit that is within your reach is good in leading you not into temptation, delivering you from the evils of buying things you probably cannot afford.
A strategy one can employ in making the most of the grace period within one’s credit card limit is including the amount that they would have spent using their credit card in their monthly budget. That way you are building a credit score whilst not paying any interest at all, since the money you use from your credit card isn’t money you absolutely don’t have. Remember the trick here is to hate credit on items that depreciate in value but reap the awards from having a credit card. If you can apply these strategies successfully then credit cards to you could be the next best thing since Lady Gaga!