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Similar to a prescription or over-the-counter medicine, credit cards can either be beneficial or detrimental to your health (financial health, in the case of credit cards), depending on whether you use them correctly or abuse them.
Let’s take a look at several ways that credit cards can actually save you money, if used correctly:
- Building Credit History
Credit cards serve an important role in that they are one of the first tools that can be used by young adults to help build a credit history and credit score. Why is this credit history important? Well, it will be used by future creditors to assess your financial repayment risk. If you have a good credit history, less risk will be incurred by the lending institution, which translates to a lower interest rate for you when you take out a loan. On a home loan, this could mean a savings to the tune of tens of thousands of Dollars.
- Transaction Purchase History Tracking
A great feature provided when using credit cards for all your common purchases is that it provides a nice central location to track your purchase history. This is very useful because it enables you to track each Dollar you spend, group them in to categories on a spreadsheet, and then observe areas where you can cut back and save money.
- Credit Card Sign Up Bonuses
Credit card companies are competing heavily for your business, particularly the business of good customers. Thus, many now offer hefty incentives to sign up with their cards. For example, you can often receive $100 sign up bonuses simply by applying to specific cards. This money can then be applied to your regular monthly spending to save money in other areas.
- Short-Term Borrowing Account
Although this strategy will not make you rich by any means, using a credit card for all your monthly purchases can enable you to save more money by acting as a short-term borrowing account. What this means is that each month, instead of keeping your spending cash in a non-interest bearing checking account, park that money in an interest-bearing savings account or money market mutual fund (something very liquid/safe that can be accessed quickly). Meanwhile, make all your monthly purchases with your credit card, allow your cash to build up some interest, and then transfer your cash back to your checking account at the end of the month to pay your credit card bill ON TIME to not incur interest on the card.
- Balance Transfers
Although this last strategy is not for everyone, low/0% credit card balance transfer offers can be used to save some big money. What this means is that if you currently have credit card debt carrying a 20% interest rate, you could open up a new balance transfer account on a new or existing card, transfer your outstanding credit card balance to the new card which has a low interest rate, thus saving you from paying the higher interest rate on the previous card.
However, there is a caveat to this strategy. Often, the balance transfer low interest rate offer will only be good for 6 months to 1 year. After this time, the interest rate will revert to a high figure, possibly higher than your previous card. Thus, you have to be disciplined in order for this to work.
I’m a big fan of credit cards and their advantages. When used smartly, they have lots of bonuses and not much downside. If you’re not smart about using them though, be prepared for heaps of trouble. Building a credit history is definitely important if you’re going to be buying property soon. Transaction tracking and the bonuses are also good reasons to get cards (I’ve made thousands on bonuses).
However, I’ve never done the short term borrowing or balance transfers. Maybe back when interest rates were high the short term borrowing made sense. Now though, you’d have to have $100,000 in your bank account just to make $100/month. Not really worth the hassle to me. Same thing with the balance transfers – back when CDs were in the 5% range, it might have made sense, but just not today. Still, good strategies to keep in mind if rates start to come back up!
Nice list, Pauline. Credit cards, when used properly, are a great financial tool. Too many people have misused them and borrowed money they couldn’t afford to repay.