CFO of Life 25# The Power of Credit Cards: A Personal Experience

Let me give you a powerful example of why you need a credit card. A few weeks ago, I booked an exam for my father as he needed to renew his driver’s licence. The company took the payment and provided a receipt. But after ten days of radio silence and no booking confirmation, I had to take things into my hands.

I called American Express and within 5 minutes, the charge was reversed. There were no hoops to jump through, no extensive wait and the employee made me feel special. They listened carefully to what I said, asked a few questions and explained the procedure. Then voala, just a few days later, the money was credited back to my account.?

Good luck doing this with your debit card. You will wait for at least one hour just to speak to someone. And they are likely to tell you that they can’t do anything because it is your money. While there is a slight chance you might get a refund, I wouldn’t bet my money on it and that’s why I always pay with my credit card!

I know it might’ve seemed like I was preaching that credit cards are evil last week, but that is not exactly true.?

Now, it is only fair to start with reminding that there is a huge difference between a credit and a debit card. For starters, a debit card only contains your money and nothing else (except if you have an overdraft, which can save you from time to time, but it could also cost an arm and a leg.) And if you don't add more money, the maximum you can use is what you have.

But on the contrary, a credit card has a certain amount of available money that the bank lends you. And here is the key to the biggest benefit of a credit card, this is the bank's money! If something happens to it, it is the bank taking the risk, not you! And if you are a good steward of your credit, all you need to do in order to get a higher credit limit is ask.

Still, there are some drawbacks that should not be ignored! For once, a normal credit card has a 19-23% Annual Percentage Rate (APR) and some cards have up to 400%+ APR. This can quite quickly compound any amount into a small fortune and you might pay a yearly tax for “the luxury” of it.

Also, if you miss a payment, then this will reflect on your credit score. It will not decrease your credit score a lot, but any points could be important! While in some countries this will not be the case for the first 30 days, you shouldn’t rely on it.

The other huge negative to do with credit cards is that they might enable some bad behaviours. They can lure people into making big purchases from a credit line they can’t service and that could be damaging when coupled with a high-interest rate.

On the contrary, credit cards have a lot of benefits that should not be brushed off! Those benefits are what make credit cards worth it!?

The most notable benefits are:

• Exceptional customer support
• Unmeasurably high level of fraud protection
• Extended warranty on some purchases
• Concierge service that can get you out of sticky situations
• Building up your credit score
• Collecting loyalty points that can be used to buy flights or book hotels
• A bridge loan that can help you balance your cash flow if needed

You can look at those as the “settings” of an electric tool. If used correctly, the tool can complete the desired task quicker, but if not, it will drastically slow you down. To avoid that, there are a few rules you need to follow.

Those are the Do’s and Don'ts of credit cards

Do’s rules for credit cards

1) Always pay all the balance in full:

• You should strive to always cover your full balance so you never pay any interest. To do so, I have set up a direct debit from my bank account to the credit card, so my payments will always be made in full and in time.

2) Always pay with a credit card:

• When possible, always use your credit card to have the extra layer of fraud protection, collect those sweet loyalty points and keep all of your spending in one place for easy accounting

3) Shop around for a credit card:

• Not every two cards are made the same! When you are preparing to get your first card, do some digging. Choose the card that will give you the most benefits and cover most of your spending
• My first credit card was an American Express card that gave me Avios points (British Airways loyalty points). This was my most optimal choice, as it allowed me to start collecting points and status with my favourite airline
• So do shop around and find the one that will benefit you the most. Maybe, that will be a cashback card that has a great % return on groceries or petrol. It might be an Amazon-affiliated card, so you get a good % of cash back on all your purchases. Just make sure you know what is optimal for you

4) Use no more than 10% of your credit limit

• The most optimal point credit score-wise is to use no more than 10% of your credit limit. This is because theoretically, the higher your credit use is, the more imbalanced your spending is. To avoid this, you can try and monitor your expenses and ask your credit card to lift up your credit limit

5) Make the best of all the benefits a credit card provides

• Make sure to use all the benefits of your credit card because that is why you have it! If it has 3% cash back on groceries, make sure that this is your primary card for this type of shopping. If it has 3x points on airfare, make sure to pay with this card for all your flights. This is the most important step to “maximising” the value of the card

Don't rules for credit cards

1) Don't pay for things you don’t need

• A credit card is not something that you need, it is something that can help you. Don’t use it as an excuse to buy anything and everything you can think of. This is one of the biggest mistakes people make when using a credit card

2) Avoid constantly hitting the credit limit

• If you are hitting the credit limit all the time, that shows bad cash management. It is a big red flag in the bank’s system, as it shows that you are just too close to spending all of your money at once.

3) Not paying your bills at all or paying less than the minimum

• No matter what the circumstances are, you have to pay the balance of your card. But if you can't, the bare minimum should be securing the “minimum payment” that the card asks for. This is calculated to make only the smallest dent in your credit limit. It will also prevent the sum owed to spiral out of control and become a small fortune.

4) Don’t apply for a new card less than 6 months after the last one

• ?When applying for a new card, you need to be strategic. Applying too frequently would be a problem as it raises a red flag of “why do you need so many cards?”. It will also pull your credit report, which is a no-no when it comes to credit history. That is why you should aim to apply for a new card less frequently than 6-12 months.

5) Don't get a credit card that you don’t need

• And finally, do you actually need a credit card? If you know that you are easily tempted to buy new shiny things or are not confident managing your money, then you don’t need a card. But if you know that you can control yourself, then it might not be such a bad idea.

All and all, a credit card is a great tool to have. It comes with a myriad of benefits and can help you achieve a lot of your financial goals. But you need to be meticulous in the way you use it. Only that way you will become the master of your credit card and not the other way around!

Next week, we will focus on how to make the most out of your credit card, including home advanced strategies on how to think about your point value, how to multiply your points and how to successfully deploy them.

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