24 April 2018

Six smart ways to use your credit card

Used in a smart way, credit cards can be a great source of rewards and additional benefits.

Admittedly, this statement flies in the face of conventional wisdom, as most of us have been raised to think that all debt is bad, and to avoid it at all costs. We’ve all seen “financial gurus” chopping up credit cards with scissors, and this is certainly a wise step in many cases – especially for those who’ve racked up thousands in debt and are struggling to get out of it. However, cutting up credit cards isn’t always a good idea, and many of the most successful and wealthy people we come across have achieved their success by being disciplined enough to make the most of tools such as credit cards while avoiding the pitfalls. Before we explore the smart ways to get the most from credit cards, let’s look at the drawbacks.

Credit card drawbacks:

  • Credit cards require self-discipline. If you’re not disciplined, then credit cards are not for you!
  • The interest rates are high and can quickly compound and get out of control. This means that if you’re ill-disciplined, can have cash flow issues, or need to fund the unexpected on a credit card, you can easily run into trouble by not being able to pay off your credit card balance in full and on time. Anyone not paying their balance off regularly will quickly be paying a huge amount of interest each month, which takes most people a long time to repay. In this case, paying with cash or an EFTPOS or debit card is probably a much better idea for you.
  • Fees, such as transaction fees and annual fees.
  • The combined total available limit on all your credit cards is considered debt by lenders. So, if you’re applying for a home loan from a bank and you have two credit cards, each with a limit (line of credit) of $5,000, the bank will consider that you’re already $10,000 in debt – even if you’ve never used the total limit available to you, and even if you currently owe nothing on the cards. This accounts for the fact that you canuse that line of credit if you choose to, so the bank will reduce the total amount you can borrow for a mortgage accordingly.

If anything above sounds off-putting to you, then it’s probably best you do take scissors to your credit card and stop reading now. Alternatively, for those of you that know you can use your credit card in a healthy and disciplined way, there are ways to make the most of the benefits on offer and avoid the pitfalls explained above. Let’s explore five smart ways that your credit card can become a great financial ally.

Joseph Darby, CEO Milestone Direct

Joseph Darby, CEO Milestone Direct

  1. Reward points or cash back

In most cases, rewards and cash back are why disciplined paying with plastic beats paying by cash. Many card rewards work on point systems where you earn a dedicated number of points for each dollar amount spent, while others offer cash back to a percentage value of the total spend. Reward benefits are almost endless, and the key is to find a card that best fits your individual spending patterns, for example:

  • Airpoints may suit those who travel often by air.
  • Co-branded cards with petrol stations may suit those who travel often by car.
  • Cashback can suit nearly everyone.
  1. Sign up bonuses

Financial institutions such as banks want you to have a credit card, so many of their cards offer bonuses for those who sign up for one. A large hit of cash, air points, or reward points for essentially doing nothing is very appealing.

  1. Credit building

If you’ve never had a student loan, loan, mortgage, or any other debt, you may have a limited credit history. Well-disciplined use of a credit card can build a good credit history and prove you can be disciplined, which may increase your chances of getting ‘good’ debt later, such as a home loan. If you’re applying for a home loan, it can be a good idea to drop all the limits on your cards to $1,000 or $2,000 so it doesn’t negatively impact the loan application.

  1. Interest-free period

Most credit cards now offer an interest-free period of 30-60 days on all purchases. Alternatively, if you pay with an EFTPOS or debit card, cash, or online banking, your money is gone instantly.

When you make a credit card purchase, your money remains in your regular bank account until a few weeks later when you pay your credit card bill. This enables you to benefit from the time value of money, as your funds could be sitting in a savings account earning interest before your credit card payment is due. Additionally, the tiniest amount of inflation will also take hold between you making a purchase and your payment’s due date – saving you even more.

  1. Safety

Paying with a credit card makes it easier to avoid losses from fraud. As is the case for your own spending, if your EFTPOS or debit card is used by a thief, the funds leave your account instantly. Alternatively, if your credit card is used fraudulently, you haven’t lost any cash, owing to the delay before a credit card company makes payment to the provider of goods or services. So, if you’re the victim of fraud, all that needs to be done is to notify your credit card company of the attempt and tell them not to pay for the transactions you didn’t make. Usually, the credit card company investigates and resolves the matter.

  1. Insurance

Many credit cards automatically come with a range of protections and benefits most people don’t even realise they have, such as rental car insurance, travel insurance, and even warranties on purchases which can exceed the manufacturer’s warranty.

The bottom line

Credit cards are well suited to disciplined people who remain aware of their need to pay off their credit card in full before any interest is incurred, while maximising the benefits.

If you’re capable of using a credit card responsibly, then shifting as many purchases as possible to a good credit card is probably a wise idea. Then the benefits explained above will add up to put you comfortably ahead of where you’d be if you were just using cash and EFTPOS.

Credit cards have a number of benefits

Credit cards have a number of benefits

This article was contributed by Joseph Darby, CEO and authorised financial adviser at Milestone Direct. This article first appeared on the Milestone Direct website. A disclosure statement for Joseph Darby is available on request and free of charge.

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Sir Michael Cullen is a Director of Lifetime Retirement Income

Sir Michael Cullen is a Director of Lifetime Retirement Income