Time to Make Cents

Credit cards are a double-edged sword. While they do provide users with the ability to make purchases by paying no money upfront, they are also the cause of many people’s financial problems. Credit cards allow people to spend money that they do not have, only to face months or even years of interest payments for their inability to wait to make purchases. This does not mean that credit cards cannot be used properly or are not good to have during emergencies, it just means that you need to be very careful when using them and know how to take full advantage of your credit card (instead of your credit card taking full advantage of you).

Credit cards allow users to make purchases on credit, which means that they do not have to pay money for the good or service up front. Instead, the credit card company will pay for the product on the customers behalf (minus a small fee of around 2-3% charged to the merchant). The customer then has 30 days to pay off their purchase. If the customer does not pay off the entire balance of their credit card after this 30 day period, the credit card company will start to charge the user interest on the balance that has to be paid off. Credit cards are notoriously known for charging very high interest rates (some even over 20%), which if left unattended can cause a person to quickly fall into huge amounts of debt. Due to the power of compound interest, this debt will continue to grow at an astonishing rate, if it is not paid down fast.

By looking at this information, it seems quite obvious that the best way to avoid falling into debt is to pay off your credit card in full each month. Well the truth is this is the best way to stay out of debt! This can be done very easily, as long as you are aware of all the purchases you make on your credit card and plan all purchases ahead of time. By preparing a budget, you can know how much money you can charge to your credit card, and ensure that this amount will be able to be paid off in full at the end of the month. If all of your credit card purchases are pre-planned, then there is no way you will fall into debt, and can benefit from delaying many of your monthly purchases to the end of the month, by paying them all at once through your credit card.

You may now be thinking what are the benefits of having a credit card then if you are just using it instead of money you already have available. Credit cards are firstly a great way to develop and improve your credit rating. This rating will fluctuate throughout your life, and will be used to determine how safe you are to lend money to (from the side of the lender). Banks will use this score to determine what interest rate to charge you on any loans you take out in the future, including a mortgage. People with better credit ratings get charged lower interest on all loans, as the banks and other lenders see these people as safer (their credit ratings prove that they pay back money they borrow on time). These means that you can save a lot of money on all of your future loans, just by developing a good credit rating. How can you do this? Just simply start using a credit card, and promptly pay off the full balance each month. As you do this, your credit rating will slowly start to improve, as you are proving yourself to be a safe borrower. Your credit limit (the amount of money you can charge to your credit card) may also be allowed to rise, allowing you access to more money each month to borrow. As long as you ensure that you never spend money that you do not have, this can allow you to use your credit card even more, and continue to improve upon your credit rating. You are able to get a copy of your credit score, and it is important that you check this score at least once a year. This is to ensure that there have been no mistakes that may cause for your score to have lowered significantly, and ensure that you are would receive a good interest rate if you decided to borrow money. For Canadians, this can be obtained for free through the mail from Equifax Canada. Just go to their site https://www.econsumer.equifax.ca/ca/main?link=OPIEM&lang=en and look for a link on the right hand side to fill out your information to receive your report for free.

Credit cards can be obtained for free or some charge annual fee’s. You should stick with a free credit card, unless you will get more value out of a card that has a fee. For example, if a credit card charges an annual fee of $80, but gives you 1% of all your purchases back at the end of the year in cash, then it makes sense to purchase this card if you will spend more than $8000 on that card in the year (1% of $8000 is $80, or the annual fee of the card). Many cards offer special points or other offers, so make sure you figure out the real money value of what these things are worth in comparison to what the annual fee is to see if it is worth you paying that fee to use the credit card. You can get a credit card at your local bank. Look at all the credit cards available to you, and choose the one that best meets your needs. Be sure to ask any questions that you have, including finding out what the annual percentage rate (APR) of interest is on the card. Many credit cards offer specials for the a short period of time (very low APR for 3 months or something similar to that) so be sure to find out how long the special lasts and what the normal rates will be after that time.

Paying off your credit card takes less than 10 minutes each month. You will be mailed your monthly statements, which will detail all of your monthly purchases. Keep all of your receipts, and as soon as you receive this statement review all of the purchases to make sure there were no mistakes in your billing. You can then either pay the bill at the bank, or more conveniently pay the bill online or through telephone banking (as long as you are able to do so with your bank account). This allows for instant payment, and will make it easier for you to ensure that you pay off your monthly bills on time. It is important that you know how long you have to pay off your monthly statements before interest is charged, so that you do not have to pay any unnecessary interest payments each month. The best way to ensure this though is to pay off the credit card as soon as you receive your bill. This will get you into a good pattern, and will ensure that in the future you don’t miss any monthly payments, which causes you to pay money that can be better used else where.

Personal finance is about taking control of your money, and credit cards can allow you to do this, if used properly. Always remember the risks that come with credit cards, as even one purchase can cause you to start falling into a deep hole of debt. Responsible use though will allow you to develop a good credit score, which will make it easier to borrow money in the future and allow you to pay a lower interest rate on this borrowed money. Your personal finances is now a little easier, as now the credit card is no longer controls you, but rather you control your credit card!