Credit cards – a good servant but a bad master
Most of us use credit cards regularly to manage our day-to-day expenses. Here are some principles to keep in mind when using plastic.
Rule 1 – Always pay off the balance in full each month
This seems like a simple thing, but it’s amazing how many people I’ve come across who keep an unpaid 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 that holds the full payment on the due date. This is not a widely used facility, so you may need to request the form from your bank. Paying off your credit card by direct debit will also ensure you make the most of your interest free days (see rule 3).
If you are struggling to pay off your credit card – then you need to take the time to budget and monitor your cash flow on a weekly basis.
Rule 2 – Always check your credit card statement
If you’re like me, your credit card statement runs to several pages or more, and it’s often hard to remember what you spent money on. This problem is compounded by the fact that the name on the credit card statement often bears little resemblance to the Merchant! You can sit down at the end of the month with your significant other over a glass of wine and mark each line on the statement. However, my preferred method is to categorize each credit card entry on a weekly basis using cash flow software which dynamically downloads all transactions. This may sound cumbersome, but once you get into the routine, you’ll feel like you’re 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 choosing your card. Only purchases made on Day 1 of your credit card cycle will qualify for the full 55 interest-free days. So it may be worth planning for very large purchases early in your credit card cycle. This strategy is especially useful if you have a mortgage with an offset account, as the money in your account saves you interest on your home loan. However, if you are late by even a day, banks charge retroactive interest for the entire period ie. you lose the interest free days. So always make sure you pay off the balance in full on the due date.
Rule 4 – Reward points are great
I don’t have the space here to discuss all the pros and cons of the various credit card rewards programs. Suffice to say, the best solution is to keep it simple. Personally, I accumulate points on my card that can be redeemed for almost anything including; Myers gift vouchers, Apple products and Flight Center dollars. I usually go for the latter as it takes a big chunk out of the cost of a family holiday. There are others who prefer to have their points go towards their frequent flyer program. It’s a good bang for your buck, but you need to plan well in advance to make sure there are seats for frequent flyers when you want to travel.
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