I hear it all too often from people that credit cards are “bad“. “Credit cards are so expensive to use!” say some, and the the most common one is “The banks just charges way to much interest on credit cards.“. The funny thing is that a credit card is the best financial product offered by banks, in the world. There is no other banking product that allows you to keep your money for 55 days, gives you substantial interest on a credit balance and charges you no transaction fees!
The only reason people are scared of using credit cards is that they are misinformed. You just see people flashing their credit cards all over the show, and you think to yourself, “shame, that person can’t manage their debt.” But the truth is, that using a credit card properly, actually can save and make you money! So listen up, and adhere to my tips on credit card usage, and you will save money!
Choosing the right credit card
Every single banking institution, and lately, large corporate companies offer some sort of credit card. All have different interest rates, annual fees, rewards schemes, etc. So finding the credit card that is right for you is very important. Once you have all the facts, you can make the right decision on which card to choose.
If you have never owned a credit card before, or are new to the whole credit card thing, go straight to Virgin Money and sign up. As long as you are earning a living, you should qualify. The reason I choose Virgin, are two simple factors. No annual fees, which in essence makes owning a credit card free, and their 5% credit interest rate. But you might be on Discovery Medical, and their credit card might appeal to you more because of their rewards scheme etc. Choose wisely, but don’t not choose a credit card!
How to use a credit card wisely
This is the step where a lot of people get caught, and get stuck in the never ending spiral of debt and interest-on-debt repayment. Your credit card will have a limit that you are allowed to spend. Remember, this doesn’t mean you must spend that amount every month! Draw up a budget, and the amount of money you spend a month on your credit card must be on that budget, so that at the end of the month, you haven’t spent more money than you earn.
The rules of a credit card are so, that if you buy a pair of shoes on your credit card today, you only have to pay the bank back for those shoes in 55 days time. 55 days! That is almost two months! This is where you can make money from the bank. Using this rule means that the money that you owe for those shoes should be sitting in an interest-bearing account so that for 55 days you can earn interest on the money that the bank just lent you for 55 days, interest free! Confusing you hey? Look at this example…
- I have R1000 in my savings account, and I want to buy a pair of shoes.
- Puma sneakers: R1000 (Some bling man!)
- Pay for these sneakers using your Credit Card.
- Transaction fees buying sneakers: R0
- For 55 days that R1000 is earning interest sitting in your savings account.
- After 55 days, you transfer that R1000 into your credit card – in order to pay the bank back for your funky shoes.
- You get charged not 1 cent from the bank, but you have just earned interest on the bank’s money for 55 days!
Stick to these 3 rules, and make money with your credit card!
- Do not spend on your credit card what you cannot buy with hard cash. Buy that pair of sneakers on your credit card, but if you do not have the hard cash in the bank, do not charge it!
- Pay back the full amount you owe on your credit card every single month. By missing just one payment, all your hard work saving, can be lost, because of the high rate at which you get charged for late, or not paying up in full. Sometimes up to 25% on your outstanding amount!
- If you do not have a savings account to utilise, put all your monthly spending budget into your credit card, and earn interest that way! That means you can earn up to 5% on your spare cash lying around!