August 29, 2012

Paper or Plastic?

By Andrew at 1:53 PM

Credit card debt can be an awful burden. In fact, it is a huge problem in our culture today. However, when used appropriately, credit card usage can be very profitable to the consumer. But you must know how to use it appropriately so that it does not take over your life.
Credit card use is not for everyone. If someone is prone to unrestricted shopping sprees, then a credit card may be too much of a temptation. However, for the disciplined consumer it can be very useful. So the first priority of credit card use is to know yourself, and to know whether or not you are someone who can safely use a credit card to your own advantage.
The next principle is to always pay the card off each month. Credit cards serve as mini loans, but the trick to these loans is to pay them off each month before beginning to accumulate interest via the exorbitant interest rates levied on outstanding balances. In order to avoid such charges, I personally make it a practice to not charge money to my credit card unless I have the funds in the bank to back it up. Which leads to a benefit of the credit card, the fact that your money in the bank can be earning interest over the period that you have to pay back your credit card “loan” without being charged interest on the borrowed money. That is making your money work for you.
Another benefit of modern credit cards is the ability to manage your account online. Through this method, you are more easily able to keep your funds in a savings account, earning interest, right up until the time the bill is due. This allows you to maximize the interest you earn while also enabling you to automate and manage your account from anywhere in the world.
One benefit of credit cards that I imagine is underutilized is the rewards plans instituted by many credit companies. For each dollar you spend, most companies award you points or funds. Once you have accumulated sufficient points, they will often allow you to apply the balance toward you bill, or, to even greater advantage, to turn the points into an even greater reward through various promotions such as gift cards from partners that can be worth even more that the accumulated amount of points. Through this system you can easily increase the value of the points you have earned, points that cost you no more than the purchases you made anyhow. Beyond that, you potentially have the ability to increase the reward value to 5-20% more than the original rewards value. For example, after charging $2,000 to a card and accumulating $20 in points, you may be able to trade those points in for a $25 gift card to your favorite restaurant.
Credit cards are not always the best for us financially. Right now, however, it is working out fairly well for me to use a credit card as long as I pay it off monthly, but were my situation to change I would definitely need to re-evaluate. Each person’s financial situation is unique, but I hope that my credit experience, however limited it is, can be useful to you when examining your financial situation.


*I am not a financial planner, so please, consult with a professional before making financial decisions.

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