Posted on | July 3, 2013 | No Comments
Credit cards seem to have a bad reputation due to widespread misuse of this piece of plastic. Like most things in life, credit cards are neutral; they can be put into good or bad uses. There are good debts and bad debts, good expenditure and bad expenditure etc. The bad variety makes you poor while the good variety makes you rich. It depends on how you use it, which is a function of your financial intelligence.
Using credit cards offer you more protection than using debit cards when making purchases, especially while abroad on holiday, buying airline tickets etc. You may not notice the difference is the transaction goes smoothly. In the event whereby you require a refund, the difference becomes clear. To illustrate, let me use 2 scenarios.
Imagine you travel to Egypt on vacation and bought a camera with your card. You return home to discover the camera is no longer working. You call the store and they are giving you a run around. Travelling back to Egypt to resolve it is not an option. If you used your credit card, you can call Visa or MasterCard and lay a formal complaint. Since the store is a registered merchant, Visa or MasterCard can ensure that they make the required refund, since the merchant does not want to have his merchant account suspended. As an individual, you are on your own and your bank may not want to get involved.
Imagine you bought a ticket from an airline for a trip later in the year, but the airline goes out of business. If you used your debit card, you may not be able to get your money back. If you used your credit card, Visa or MasterCard will ensure that its card holders are paid from proceeds of liquidation of the business. Companies going out of business have to pay their major creditors as part of their winding down process. If you are down on the list, you are on your own.
There is also the issue of your credit score. Lenders like banks use your credit score to evaluate the risk of borrowing money to you. The higher the risk, the higher the interest rate and the more stringent the conditions. The easiest way to have a credit score is to own a credit card. With a good score, you benefit from lower interest loans which you can use as leverage to access big ticket investments like commercial real estate etc and reap rewards higher than you would if you used your own money. It is called other people’s money (OPM)
To avoid consumer debt, use your credit card as a debit card, which means only use your credit card for items you have sufficient cash for in your bank account. This means you clear your balance each time you get your bill. You can set up a direct debit on your account to clear your credit card balance at each billing cycle. With most cards, you have 45 days interest free credit, which means if you clear your balance at each billing cycle, you pay 0% APR. This in effect means you use it like a debit card but with the full protection and benefits that a credit card confers.
Also if you know what you are doing, you can draw on your credit card to acquire assets that will pay for itself. This means you can borrow from your credit card (24% APR) to invest in an asset with a 40% return or more, which means the item will clear your balance and put money in your pocket. This is when you know what you are doing. If you are not sure, then you better use your money with 0% interest rate.
Usiere Uko is a writer and bestselling author of Practical Steps to Financial Freedom and Independence, Available on Amazon.