The previous column in this series was about managing income and expenses, especially putting away some part of what you earn for investment and wealth creation. A key maxim of wealth creation is to keep track of expenses and avoid, or at least minimise, spending wherever possible.
The proper use of credit cards is one such opportunity. Such cards are a great convenience and can actually help you manage your expenses and maybe even give you some minor financial benefits if managed well. By definition, credit cards offer the user rolling credit, which is typically spread over three to four weeks.
Credit is always a good thing to have as you get the benefit of expenditure without having to part with your money. However, credit can also be dangerous if not managed well.
Benefits, and downside too
The benefit of credit cards is obvious but not many are aware of their downside if they’re used improperly. As long as you pay the outstanding amount on or before the due date, the user might actually benefit from using these cards. As savings account balances also earn some interest, money in your savings account is earning for you while you can spend the equivalent value using a credit card.
However, when the total amount due is not paid by the user, the balance unpaid amount starts to accrue interest, which adds up very fast. This is mainly because the interest charged by credit card companies on the unpaid balance amount due is very high.
That is why the cardinal rule is to always pay the full outstanding amount on your card well within the due date. Always remember that the flip side of credit card usage is when anyone spends beyond their means and pays only the minimum amount, they are creating massive financial liabilities for the future because of the high interest on such unpaid balances.
Cards with different pay dates
A smart option is to have two credit cards and select credit cycles that are not the same. This means that the payment due date for one card should be towards the start of the month and the due date for the other should be towards the third week or the end of the month. The trick is to use the credit cards by rotation, just after their bills have been generated for a two-month period. In this manner a person might end up getting free credit for as much as forty five days if managed properly.
Needless to say, the golden rule for credit card usage is to be conscious of how much is being spent on the card. If the expenses on the card exceed the expense plan and budget, nothing will help. Keep track on the charges being incurred; this should become a habit and one should not discover the extent of expenditure only upon receiving the card statement.
Expense tracker apps
One simple way to manage credit card usage in terms of charges being incurred on them is through mobile apps. There are many mobile apps in the market today including several free ones. Download such an app and ensure that your spending on the card is being tracked as also that you pay the full outstanding amount on time.
Remember, free credit is a great thing which helps your money to earn some nominal interest in your account while you spend. However, it can soon become a financial nightmare if not managed properly. A similar logic applies to the emerging e-wallet options.
Load only the bare minimum amount required for use and don’t end up locking up your money in these wallets. Any excess amount in such e-wallets usually does not earn interest and, on the contrary, you might have to pay a charge to transfer it back to your bank account.
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