Sunday 15 October 2006

Frugal living: credit cards

Yes, Credit Cards CAN be good for you! I have one credit card that I use for all my day-to-day expenses (shopping, petrol, bill payments) but as I pay off the balance each month in full, it doesn't cost me a cent in interest - the only cost to me is the annual fee of $19.80

The card has a "rewards" program which gives you some points for spend, and one of the redemption options is to get a $100 credit onto your card for 13,500 points.

This past year I've made $75.46 net profit from using my credit card (no, using a card for payments does NOT change my shopping habits and encourage me to spend more - in my mind putting $10 onto the card is exactly the same as taking a $10 note out of my wallet):
Spend  = $35,234.89
Points = 12,861
= $95.26 credit onto my card
fee = -$19.80 pa
profit = $75.46
Of course, this only works if you have the self-discipline to
a) not spend any more using the card than you would using cash,
b) always pay it off in full each month,
c) the card has a low (or no) annual fee, and
d) there's no fee for participating in the rewards program.

Over the past 20 years that I've had this same credit card, I've forgotten to pay it off by the due date three times, and have then had to pay interest on all purchases for the current month and next next billing period. On each occasion it would have cost me as much in interest as I earn in points for the entire year! This makes me VERY careful to pay the balance off in full on time - these days its much easier as I can schedule an automatic payment from my credit union savings account to my bank credit card on the due date.

One other benefit of having a credit card is that the credit limit ($15,000 on my day-to-day credit card) would allow me to cover my basic living costs for six months in the event of an "emergency". So I can choose how much to keep in interest-bearing cash accounts, rather than having to keep six months spending money sitting there.

Of course I have some other credit cards that are only used to obtain a 0% balance transfer offers, which will earn me interest on the amount I've borrowed from those lenders at 0%.

And I have one credit card used only for making internet purchases - usually only $20 or so every couple of months. I use a separate card for these purchases so that if the card details ever got stolen and misused I could cancel the card immediately to avoid liability, and it wouldn't cause any problems with my scheduled bill payments coming off my day-to-day credit card as usual.

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