The Goodness of Credit Card

The title itself would cause a massive controversy in today’s financial planning. Many people only looked at the negative portion of a credit card. That it’s interest rates is too high, uncontrollable usage and even stories of people going bankrupt due to credit cards. Now this article could be an eye opener for those people outside there. Nope, I’m not going to talk about using credit cards in case of emergencies. It actually could bring you a step closer in achieving your financial goals.

"Credit card is just a tool. How you use it, will determine the effect"

There is only one condition for these to work; you must be a person who can control the usage of credit cards, no impulsive or unnecessary spending. I’m going to talk on how you can use your credit card to save and reduce your expenses. I’ll be using examples from Malaysian’s credit cards as I’m familiar with them and I assume other countries have similar equivalent benefits. There are a total of 3 benefits you can make use out of credit cards.

Gain interest by using other people’s money.

Note: In Malaysia, this method will only work if your balance is zero. Other countries might still work even with a balance.

Every month, you’ll have a certain fixed expenses. This includes your monthly groceries, bills, gasoline, and so on. These expenses will occur whether you use your credit cards or not. This means that you have cash ready on hand (or in bank) to pay for these expenses. Now, you use your credit card as if it’s your debit card. Whatever you spend, use your credit card to buy them.

Now, some of you might be asking, why not I just use cash or a real debit card. The answer is, with credit card, you are using other people’s money (OPM). Who are the other people? It’s the bank. You use your credit card while your money sits nicely inside your bank account while it earns interest. If you use a debit card or cash, you’ll loose the chance of earning interest for yourself.

Furthermore, there is this 20 days grace period (interest free period) from the date of your credit card bill. So, let wait until the last 2 days to pay them back. You’ll further gain more interest on your money in bank. Isn’t it’s a great news. Let’s look at the illustration below. Assume your billing date is 20th every month and the investment opportunity is 5% p.a.

As you can see, if you had paid immediately with cash upon purchase, you would have missed the chance of earning that $69.68. Don’t spend that money off, invest it somewhere.

One rule of thumb, make sure you spend on what you can afford on as if it’s your cash.

Reduce your expenses

Every single dollar you spend using credit card, you’ll earn points on. These points can be used to redeem items, cash rebates, and vouchers, which is excellent. But if you put through a proper planning, it can be used to reduce your expenses. Remember by reducing your expenses, you would able to create additional savings for your financial goals.

Most people when they see they have thousands of points, they would be tempted to get unnecessary items to pamper themselves. Think for a while, would you get them with your own cash now. If the answer is no, then don’t redeem them. If you are planning to get buy with your hard earned cash, then the answer is yes. By doing this, you able to save more money and put it for a better use, let the money work for you. If you are about to buy something and you are just a couple of hundred points away to redeem it, then just wait another month or two, so that you won’t have to spend any cash.

One great item you redeem is grocery voucher from Tesco, Giant or Carrefour (These are the 3 biggest hypermarket in Malaysia; I wonder will Wal Mart ever enter the market). Since every month you would buy groceries, why not use these voucher instead and reduce your expenses.

The zero interest installment plan

This is actually a great tool offered by some banks, and it can also cause uncontrollable spending. But yet if it’s used properly, it would save you a lot of money and in fact could gain you some. Note that, even thou it’s zero interest, some banks charge some very low administrative fee.

There are 2 way to look at it, so let me start with the 1st approach, inflation. A dollar today is worth more than the same amount in the future. Using this principle, isn’t its better to delay the payment? The answer is definitely ‘YES’. As you can see below, with an inflation of 5%, and opting for the 36 months installment, the value of total paid at the end of 36th month, its value is only $4,963.08 on present day.


The second approach, you can invest the money you deferred and let the money work for you. If you can earn more than admin fee, isn’t its better to invest them? The answer is definitely ‘YES’. Now let’s look at the figures below. By investing the $5,000, at the end of the installment period, you could gain $411.51. If you have just paid cash, or didn’t convert or buy through ‘0% Installment Plan’, you would have lost the opportunity to gain almost $400.


Conclusion

Remember these 3 great benefits:

1. Use other people’s money by using your credit card as if it’s a debit card. Earn interest while you wait to pay before it’s due.
2. Reduce your expenses by planning your redemption to reduce your expenses.
3. Use the 0% interest installment plan to enjoy on your interest and to gain by time-money value concept.
   

The bottom line is, spend only on necessary items and make use of these 3 great benefits. These 3 benefits will only work if you already have cash. Don’t expect it to work if you are in debt.

Remember, credit card is just a tool. How you use it, would determine the effect.