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Personal finance : Why you should be using credit cards

Welcome back.

It has been exactly a month since I posted my last article, Personal finance series : How exposed are you….?. I hope that you were able to have a more objective look at your monthly household finances.

 

The time for this gap in writing is : The daily job has been taking its toll due to the quarter end, requiring lot more hours in the office. The perks of working for start ups is the proximity to the management and the decision makers. Not only am I exposed to their working style, it provides me a perspective on their thinking and mental set up.

 

All of this hard work also calls for a bit of relaxation. For this, I used the long Easter weekend to travel to Mallorca (an island in South Spain).

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Warm weather (after enduring German winters), good food and warm people were the primary reasons for visiting there. The fact that there is abundance of beaches was the cherry on the cake. Since coming back, I had shared some snapshots of the island with you, over the email.

 

Visiting Mallorca was quiet an experience apart from the vacations. This island is very popular with the people from Germany, UK and Scandinavian countries. Due to warm weather, beaches and cheaper cost of living, this island is an ideal destination for their summer homes and retirement destination. With the inflow of expat money in this island, it was easy to notice the high quality of infrastructure and amenities compared to other South European cities (e.g. Barcelona, Lisbon, Athens etc).

 

The reason it fascinated me was the level of financial freedom these people had. All of these people around me were just like me, normal people going about their lives.

 

There was only one aspect that made them different from me – they were working for themselves. This one thing creates the difference which impacts our lifestyle, learning and network. I spend most of my time working, they spend most of their time learning and expanding their network.

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So, how does any of the above relates to the topic at hand – credit card. Well, it was the most used payment method for my vacations – flights, hotel, food. This got me thinking –

Though I do not have the time freedom yet, like an entrepreneur, are there avenues for me where I can change or adapt myself to take advantage of the hidden opportunities,

I have briefly written on the topic of credit cards on Quora. Would this be another useful topic for my blog. I have had some initial thoughts and just got time to pen them down.

So, what is a credit card? For me, credit card is :

  • a means to leverage all my expenses:
    • big or small,
    • personal or professional,
    • one time or regular,
  • while getting 45-50 days of free credit.
  • Collecting reward points for all expenses,
  • Redeeming those points to fund my other purchases,
  • Eliminates the need for carrying physical cash,
  • Provides add on benefits in the form of –
    • higher reward points,
    • partners spend points – hotels, airlines or car hire,
    • loyalty rewards,
    • complimentary event invites,
    • in some cases, airport lounge accesses,
  • Builds up constant and credible credit history,
  • Enforces financial control (due to high interest rates),
  • Cheaper or free add on cards (to be used judiciously),
  • Easy to manage for due payments
  • Transparent spending track record,
  • Based on the spending and payment history:
    • Card and spending limit upgrades,
    • Priority customer support – less waiting, quick resolution, better quality interaction,
    • Higher probability of getting your way due to your value to the credit card company.

There is no better financial tool created for a common man. This tool puts the power of money in our hands.

So, what are the pitfalls to look out for –

  • free credit is only for 45-50 days, it is not free forever,
  • it is not a means for following kind of spends:
    • dream vacations,
    • expensive gadgets,
    • fancy stuff for self or household,
    • impulsive purchases,
    • financing needs,
  • careless and reckless use of the credit limits,
  • not making payments in full before the due date,
  • paying exorbitant fees, charges and fines,
  • getting carried away by short term decisions,
  • creating a justification for a wish as a need,
  • letting credit card take over your life.

Current situation: Due to the above pitfalls, there is widespread mistrust and mis-understanding about credit cards. I personally compare using credit card to driving a car.

 

Good :

Long drives in the car, vacations in a car – all good experiences because the driver is sober and careful, follows traffic rules and is generally careful.

All the above benefits of using credit cards – user is responsible, knowledgeable and exercises financial control.

 

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Not so good:

Car accidents due to drunk driving – driver not careful,  not responsible enough for others and himself, disregarding traffic rules.

Credit card debt – mis-using credit card as if there is no tomorrow, not making full payments before due dates, not stopping use of credit card till the backlog is paid off in full.

Common reasons people fail to capitalise on the credit cards:

  • lack of financial control,
  • unaware of the interest rates for late payments,
  • unaware f the late payment fees on due amounts,
  • running through all the pitfalls of using credit cards mentioned above,
  • not learning from previous mistakes,
  • continuing to use the credit cards for consumption expenses
  • assuming that:
    • getting new or more credit cards will solve the problem,
    • doing balance transfer is the solution,
    • ignoring that there is a financial problem will solve the problem.
  • Using credit card ash withdrawals.
  • Using credit cards for investment, trading, buying cryptos etc,
  • Accumulating the credit card debt over a period of time.

Due to the consumeristic and materialistic society that we live in, we can not out run all of the temptations. There is a strong push by the marketing companies, across all the media (online, print, social and professional), to keep us buying more.

For the buying impulses that we give in to, it will be prudent to do the spend in a way, which benefits us in some way. I welcome your feedback and thoughts on this topic.

Feel free to mail me at financialblogger@gmail.com

General Personal finance : Why you should be using credit cards

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