Sep 15, 2008

Credit Cards

I'd like to tackle the subject of credit cards and tell you why I think they are a good thing. I read a lot of articles which say things like "You don't need credit cards at all". Whilst I agree that a lot of people don't want credit cards, I also tend to believe that they can be used to your advantage.

Let me give you the example of how I use my credit card. Please note, I'm not saying everyone should use theirs this way, I'm not even saying that everyone should have one, I'm just relating how I use mine. But first, here's a little background information.

All credit cards good here
Photo: shawnzlea

Part of my mortgage is in one of those 'revolving' type mortgages, the ones where you have a fairly large negative balance on which you pay interest. This can put some people off, but it means you get the chance of paying off more of your mortgage each month and you're not locked in to any particular amount. You pay back what you can afford. It's good for those of us who are on top of our spending.

When my income goes into my revolving account my balance goes up (as is normal) and every time I spend money from my current account, the balance (as usual) goes down. However since the account is largely in the negative, it seems slightly strange. As is usual on a debt, I am of course paying interest on it for the privilege. The aim of the game is that the longer you keep your paycheck in there the less interest you pay which is definitely is a good move. And, like all the other savers out there, the less I spend from this account the better off I am. To put it another way the more and longer I can keep money in my account the less interest I'll have to pay on it.

This is where my credit card comes into play.

Each month I use my card for a number of purchases. Purchases that I shall be doing anyway and also purchases for which I know I will be able to pay off - in full - next month. Examples of these standard purchases are: my electricity bill, my phone bill and my mobile bill. No matter what I do every month, I shall be living in a house and I shall need to pay these things. Therefore I choose to get them automatically deducted from my credit card. This helps in three ways:

1) I need to do nothing to pay the bills. No matter what I do, they'll be paid. I never forget to pay, therefore I get a prompt payment discount for paying on time and I'll never have late fees.

2) The money I would anyway have given to the utility bills stays in my revolving account for around about an extra 4-6 weeks. This means that I pay less interest in my revolving account since my balance is less in the negative.

3) Each and every year I manage to rack up around $120 on my 'Reward Points' which I can spend, as cash, in a number of shops. For the privilege of owning the card, I pay around $44 a year. That seems like a good bargain to me. In the past I have bought myself pairs of trainers with the balance but since my current ones are still going I haven't needed another pair. Currently I have $192.29 dollars sitting on it (if only I could exchange it for cash). My last pair of trainers lasted me four years so that could be almost twelve years where I don't have to purchase any footware. (I did have a pair of Doc Martens once which lasted me 9 years.)

So the upshot of all this is that my credit card is not only saving me money but actually giving me money too. I never pay interest and I don't have to lift a finger to do any of it. The balance comes out of my revolving account automatically too.

That's what I call a bargain and you can see why I think Credit Cards can have their place.

Final note: I appreciate that Credit Cards aren't for everyone, either because they'll overspend or they don't believe in going into debt. This is just how I use mine. You should decide for yourself what the best way to use them (or not use them) is.


Tasha said...

I wanted to pay the bills using plastic but I found out that it is considered as cash advance, and that is a higher rate. I was put off by that even if I pay off bills every month. So now I just pay them in cash. I wanted to pay using plastics to earn rewards points. I'm a little ignorant here but do you get charged anything on paying bills using cc even if you pay them off?

retire-at-40 said...

Hi Tasha,

Not that I'm aware of but now you've got me thinking. I'll be checking my statements just to make sure. I'll let you know when I find out.


Perrin said...

I pay my power, mobile phone, internet and insurance bills by credit card and have never paid any interest. Not all companies allow it but for the ones that do you aren't penalised in any way that I've noticed.


Tasha said...

Isn't it that cash advance transactions automatically get debited with a fee? That's what I'm most concerned with. I don't want to pay anything on top of my utility bills, even if it's $2, just to earn reward points.

Anyway, I recently tried this route to pay for Sky and didn't see any cash advance charges. I can't remember where I read that it would be considered as cash advance... it might be on another company's website... uhm...