Using your credit card effectively

There are many opinions out there when it comes to credit cards.  Some people believe they are evil and bring nothing but trouble, whilst others believe they can be a great financial tool with numerous benefits.

The truth is that both camps can be right, but the answer really depends on the user of the card.  Used effectively, a credit card can be a great financial tool, but when used poorly they can certainly lead to financial problems.

In this article we will look at the various steps you can take to ensure you are using your card in the right way.

Start with the right card

The first step is to ensure you have the right card for your needs.  Ultimately you want the credit card that offers the lowest interest rate and fees, but there are a few extra factors to consider.

If you can clear your balance each month, you will want a card with interest free days.  Provided that you repay the full balance on each statement, no interest will be charged on any of your purchases.  The interest rate is generally higher, however that shouldn’t be a concern provided that you clear the balance each month.

If you cannot clear your balance each month, then you are better off using a low rate credit card with no interest free days.  Because you are carrying a balance there is no point having interest free days, as you will be charged interest on all purchases regardless.

Low rate balance transfers

For those who cannot clear their balances each month, there is still a way to benefit from a credit card.

Many banks offer promotional rate balance transfers.  This simply means that the bank will reward you with a lower interest rate for transferring your other credit card balances to your new card.

Most low rate balance transfers are limited to a specific timeframe.  The offer may for example be 2.9% for a period of six months.  Sometimes you can get a longer timeframe with a slightly higher interest rate.

These promotional rates are generally very low, and can significantly reduce your monthly interest bill.  By directing the interest savings back into your credit card you will be able to reduce your credit card debt sooner.

Budgeting using credit cards

One of the benefits of a credit card is that all of your spending is tracked very closely.  At the end of each monthly billing cycle you will receive a detailed statement showing you exactly how your money is being spent.

This level of tracking could be achieved when using cash, however it would be far more difficult and time consuming.  By receiving a detailed monthly statement of their spending, savvy budgeters can analyse their spending and identify areas for further savings.

Reducing your mortgage with a credit card

By combining an interest free credit card with a mortgage offset account, borrowers can reduce their home loans sooner by saving on interest.

This strategy works by taking advantage of the interest free days on the credit card to maximise the amount of money sitting in their mortgage offset account at all times.

When using this strategy it is absolutely vital to clear the credit card balance each month.

Is your credit card good or bad for you?

Whether or not your credit card is good or bad for your financial health really depends on how you use it.  Used effectively they can be a very convenient financial tool with a number of benefits, but when not used effectively they can be more trouble than they’re worth.

As with many things in life and most financial matters, effective credit card use really comes down to knowledge and discipline.

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