Credit cards: a good servant but a bad master

Most of us use credit cards regularly to manage our daily expenses. Here are some principles to keep in mind when using plastic.

Rule 1 – Always pay the balance in full each month

This sounds like a simple thing, but it’s amazing how many people I’ve come across who keep an outstanding balance on their card increasing interest at an alarming rate. The best way to avoid this is to set up a direct debit from your bank account daily that deducts the entire payment on the due date. This is not a widely used facility, so you may need to request the form from your bank. Paying your credit card by direct debit will also ensure that you make the most of your interest-free days (see rule 3).

If you find it difficult to pay off your credit card, then you should spend time preparing a budget and monitoring your cash flow on a weekly basis.

Rule 2: Always check your credit card statement

If you’re like me, your credit card statement takes up a couple of pages or more, and it’s often hard to remember where you spent the money. Compounding this problem is the fact that the name on the credit card statement often bears little resemblance to the Provider! You can sit down at the end of the month with your spouse over a glass of wine and mark each line of the statement. However, my preferred method is to categorize each credit card entry on a weekly basis using cash flow software that dynamically downloads all transactions. This may seem cumbersome, but once you get into the routine, you’ll feel in control of your finances.

Rule 3 – Make the most of interest-free days

This is a great gift from banks. Many credit cards have a maximum of 55 days without interest and this should be a key criteria when selecting your card. Only purchases made on day 1 of your credit card cycle will qualify for the full 55 days without interest. Therefore, it may be worth scheduling very large purchases early in your credit card cycle. This strategy is particularly useful if you have a mortgage with an offset account since the money in your account saves you interest on your home loan. However, if you pay even one day late, banks charge interest retrospectively on the entire period, ie. you lose interest free days. Therefore, always be sure to pay the balance in full on the due date.

Rule 4 – Reward points are great

I don’t have space here to discuss all the pros and cons of the various credit card rewards programs. Suffice to say that the best solution is to keep it simple. Personally I have increased points on my card which can be redeemed for almost anything including; gift vouchers to Myers, Apple products and Flight Center dollars. I usually choose the latter as it greatly reduces the cost of family vacations. There are others who prefer to have their points directed to their frequent flyer program. This is a good bang for your buck, but you need to plan ahead to make sure there are frequent flyer seats when you want to travel.