19 Dec Credit cards – a good servant but a bad master
Most of us use credit cards on a regular basis to manage our day to day expenses. Here are some principles to keep in mind when using the plastic.
Rule 1 – Always pay off the balance in full each month
This seems like a simple thing, but it is amazing how many people I have come across who keep an outstanding balance on their card accruing interest at an alarming rate. The best way to avoid this is to set up a direct debit from your everyday bank account which deducts the full payment on the due date. This is not a widely used facility so you may need to ask your bank for the form. Paying your credit card by direct debit will also ensure that you make the most of interest free days (see rule 3).
If you are finding it difficult to pay off your credit card – then you need to spend the time preparing a budget and monitoring your cashflow on a weekly basis. Refer to our post on cashflow and budgeting tools.
Rule 2 – Always check your credit card statement
If you are like me, your credit card statement runs to a couple of pages or more and it is often hard to remember what you spent money on. Compounding this problem is the fact that the name on the credit card statement often bears little resemblance to the Vendor! You can sit down at the end of the month with your spouse over a glass of wine and tick off each line on the statement. However, my preferred method is to categorise each entry on the credit card on a weekly basis using cashflow software which dynamically downloads all transactions. This may sound cumbersome but once you get into the routine, you will feel in control of your finances.
Rule 3 – Make the most of interest free days
This is a great gift from the banks. Many credit cards have a maximum of 55 interest free days and this should be a key criterion when selecting your card. Only purchases made on day 1 of your credit card cycle will qualify for the full 55 days interest free. So it may be worthwhile to time very big purchases at the beginning of your credit card cycle. This strategy is particularly useful if you have a mortgage with an offset account as the money in your account is saving you interest on your home loan. However, if you pay even one day late, the banks retrospectively charge interest on the entire period ie. you forfeit the interest free days. Therefore, always make sure that you pay off the balance in full at the due date.
Rule 4 – Credit Card reward points are great
I don’t have space here to discuss all the pros and cons of the various credit card reward programs. Suffice to say that the best solution is to keep it simple. Personally, I accrue points on my card which can be redeemed for just about anything including; gift vouchers to Myers, Apple products and Flight Centre dollars. I generally choose the latter as this takes a big slice off the cost of the family holiday. There are others who prefer to have their points directed to their frequent flyer program. This is good bang for your buck, but you need to plan well in advance to ensure that there are frequent flyer seats when you want to travel.
The above list is far from exhaustive. Please leave a reply below if you have any other tips or traps you would like to share.
About Reuben Zelwer
Reuben Zelwer established Adapt Wealth Management in 2011 to help time poor clients achieve financial freedom. For over 15 years, Reuben has helped professionals, executives, business owner and those approaching retirement make the most of their circumstances by making good financial decisions. Reuben’s professional practice is complemented by substantial voluntary work, which has included setting up financial literacy and savings programs in the local community.