There are lots of pages on the Internet about managing credit card debt. But I think it’s better not to get into debt. There are a few entries on how to use cards wisely. But I don’t really agree with them. They still assume you’re going to get into debt. Here’s how I use my credit card.
People make fundamental assumptions about credit cards that I think are wrong:
* Credit cards are for buying things that you can’t afford;
* The credit card interest rate is important.
Let’s look into that in a bit more detail.
Credit cards provide a convenient way of paying for things without using money immediately. So that money can be somewhere else. Many people think it’s OK to use money that they will earn in the future. It’s not. Do that, and you’re in debt. I have that money sitting in my on-call savings account, earning interest. Then, once a month, I pay off my total credit card balance. Therefore, I don’t pay any interest.
The interest rate on my credit card is not relevant, because I never incur it. It’s far more sensible for me to take money from an interest-bearing account to pay off debt, than it is to keep money earning interest at a lower rate than the interest being accumulated by the debt. But don’t worry, I’m not using up all my savings to pay off my credit card. I’ll explain more about my budgeting.
When my parents were my age, it was very difficult to get credit. People got credit for buying houses or cars, but not much else. In fact, people who needed a loan were shunned to certain extent, as getting into debt was shameful. My parents saved up for the things they wanted.
And so do I. My budget details all my regular monthly spending, with limits, and I keep track of what I spend. I never spend more than I can afford and I save as much as I can. Over the years, I’ve bought and sold a couple of houses, and sequestered that money away. It’s been very wise as I’m now on enforced sabbatical (no regular work) and earning about 10% of my previous income. I’m living off money I have previously saved.
I don’t in fact need my credit card. Back in late 2006 I consulted a financial advisor, set up my budgeting system and started keeping tracking of my spending. I actually used cash for the first couple of years. The theory was that once the purse was empty, that was it for the month. This year I understand my spending patterns well enough so that I’ve gone back to electronic transactions. I make sure I keep receipts and check my accounts to track the spending.
There is a good incentive for me to use my credit card, however. My credit card company gives me a 1% reward on the total turnover for the year, in the form of cash on the card, up to a limit of $35,000. So I can get up to $350 a year, just for using the card to buy my groceries, petrol, clothes etc. But here’s the important thing: before I leave the house to go to the supermarket, I know roughly how much I can spend, and this has nothing to do with my credit card limit.
So I guess that’s how I’m different to many people who use a credit card:
* I have a budget and I stick to it;
* I don’t use credit to buy things I can’t afford;
* If I want to buy something and don’t have the money, I save up for it;
* I do use the card (because there is an incentive to use it), but it doesn’t influence what I buy, it’s just a way of paying for things;
* I pay off the card in full, every month.