In this current environment of easy credit, it’s also much easier for people to lose track of their finances. That’s what we offer in LOM.
Just a few days ago, we heard of a man named Walter Cavanagh who has 1,497 credit cards – all valid and totaling some 1.7 Million USD in credit available to him. Good for Walter, he has been able to control his spending and he says that he only uses one credit card out of all 1,497 and pays it off every month. Apart from improving his credit score, all those credit cards are more of a collection than a financing tool for Walter.
Unfortunately for most of us, we actually (need to) use our credit cards – and we don’t get to pay them off in full every month.
Imagine if Walter didn’t have the prudence and self-control he has. I mean, with 1.7 Million USD, you could buy a lot of nice stuff – designerclothes, the latest gadgets, the biggest TV you could find, a nice car. You could go on a nice vacation or eat at a fancy restaurant. Imagine if Walter wanted those and actually went on a spending spree on all 1,497 credit cards. Wow, think of all the balances and due dates he has to keep track of. But that’s not even the main issue. The primary concernwould be the interest expense, annual fees and late charges he would be grappling with every month.
A credit card can be a valuable tool if you use it properly. However, mindlessly swiping it around can instantly bring you into a whole, new world of pain. It can lower your net worth, hinder your income growth, damage your credit score, pit you against collection agencies and send you into a quagmire of regretand hopelessness.
So how should you handle all the easy credit card offers coming your way? How do you best use a credit card?
- Understand that if you don’t have the cash in your bank (or in your mattress) to pay for something, then you have no right to buy it using your credit card. Why such a rule? It’s because a credit card is best left used as a tool for convenience rather than for financing. By using a credit card rather than withdraw from an ATM each time you pay for something, you can save on bank transaction fees. You also avoid the hassle of rushing to a bank at an inopportune time just so you can buy some Tictacs. And then having enough cash to match your card purchases ensures that you can pay in full, on time, without incurring any interest expense.
- Use credit cards to get discounts, promos and freebies.Some cards offer cash back or points. Some offer free miles and rewards. Make sure you keep updated on the benefits you can get from your cards and maximize those benefits. Even if you have enough cash to pay straight, if your card offers zero installment, then avail of the promo. There is always the time value of money. The longer you are able to hold on to the money for that purchase, the more interest income you earn. The assumption, however, is that you can actually invest that money and put it to good use. Like, for example, buy some preferred shares that will earn you a dividend. The drawback however is that you would now have to monitor your cash flows and schedule your payments going forward. More attention and planning would be required on your part.
- Use credit cards to improve your credit score. Assume you don’t really need another credit card, but then a bank offers you one and you’re actually inclined to refuse. As long as you don’t need to pay an annual fee, you should accept the credit card offer and keep it activated. Why? Because doing so will benefit your credit score. However, there’s a big caveat here – just like what old Walter does, you must not use the card at all. This assumes that you have a sound emotional quotient and can control yourself. If you don’t have those qualities, then just disregard this piece of advice.
- Know the basic difference between a “want” and a “need.” It’s not an ideal world and sometimes you just NEED to buy something on credit because the cash isn’t there YET. When in such a predicament, it is essential that you know the difference between things you want and things you need. When you are about to buy something, try asking yourself first “What will happen if I just walked away without buying this? How will it impact my life? Can I live without this?” That’s how you determine whether it’s a need or a want. If you can live without that new headset you wanted for playing DOTA , then it’s just a want. But if by foregoing that headset, you stop earning a living as an online Mandarin tutor, the headset is a capital investment and a need.
All these pointers seem basic enough and simple to understand. However, it can be hard to apply them, simple as they are. Sometimes, we can get lazy or careless with monitoring and managing our cash and credit cards. Other times, we simply lose control of our emotions and just swipe the card because it feels good at the moment.
However, we can get a better grip of those emotions that can financially derail us – as we continue to improve our understanding and awareness of the proper use of credit.