Money Week – How to be smart with credit cards

This week is Money Week – the theme for this year being ‘financial resilience’.

At PocketWise, building a financially resilient community is our mission. Of course there are many approaches to being financially resilient. Education is one. Providing guidance is another. We decided to take the approach of providing you the tools to help empower yourself with all that you need to be resilient.

“Resilience” in simple terms is the ability to weather life’s challenges. Clearly financial challenges are many. On one hand you may be living beyond your means (read, racked up such a big outstanding balance on your credit card/s that it keeps you awake at night). On the other hand, you may be too conservative in your approach to saving for your future (read, invested in a conservative KiwiSaver that is just not suited to maximise your savings by the time your retire).

Financial resilience is about getting that balance right.

Debt – Credit Cards

Contrary to popular belief, credit cards are a great product. BUT, only when you use them in the right way.

Essentially, when you use your card to make a purchase, you are not spending your own money, but your bank’s money. The deal is that within the next 40 to 55 days (depending on which bank you are with), you need to return that money. If you use your credit card for all your purchases, then each month you end up owing that total amount of all your purchases to the bank.

If you pay the outstanding amount in full by the due date, you don’t pay anything additional. If you don’t pay the entire amount (yes, even if it’s a dollar less), your bank will charge you an interest of about 20% on your entire outstanding balance.

So if you want to be smart about using your credit card here are a few tips:

• Put all your purchases on your credit card. While your money is not being used it can earn interest (however small) in a bank a/c. But, remember not make more purchases on your card than what you think you can pay back next month. You should have enough cash to access when the payment is due.
• Ensure you pay of your entire outstanding amount (to the last cent) on the due date each month.
• Pay only on the due date – not before, not after. If you pay after, you will get charged interest. If you pay early, your own money is not earning interest elsewhere.

A big part of being financially resilient is being smart about how you mange your money. Do you know if you have the best credit card possible? Some have really low interest rates. Some others allow you to pay after a longer period, meaning you don’t use your own money for longer.

Compare your credit card against others to see if you have the right card.

In the second part of this series we will talk about Debt in other forms and how you can resilient about managing debt.

The PocketWise team