Credit cards have become a highly versatile financial asset for consumers in the modern world, where most payments are digital and a global market is there to be unlocked. They can be used to generate rewards, fund holidays and, similarly provide additional flexibility when making larger purchases. In many ways, credit cards are the Swiss Army Knife of financial management.
However, with great power comes great responsibility and it can be incredibly easy to be engulfed by unmanageable debt if you are not prudent with your credit card use. Nobody wants the stress of credit card debt, so this guide aims to provide all the knowledge required to spend responsibly including everything from balance transfer credit card tricks and traps to picking the right rewards program for your needs.
Consider this guide your blueprint to help you make the most of the benefits locked within your credit card without the financial hangover.
Understanding Credit Spending
Before we get into the nitty gritty of spending responsibly with credit, we first need to outline just how credit spending differs from debit spending. Most obviously, credit spending should not be considered spending with your own money, whereas debit spending will always involve spending money that’s directly deposited into your personal bank accounts.
As credit spending involves spending funds that are made available by your credit lender, it’s important to know that this type of consumer spending can accrue interest. With this in mind, the key to responsible credit use is understanding that a credit card should not be considered an extension of your income. Spending within your means will help ensure that you can pay your credit card balance in full with every monthly statement and avoid interest changes.
Budgeting with Credit Cards
One of the major benefits of credit spending is that they provide consumers with the financial flexibility to pay off bills between paychecks. Yes, you can dip into your savings accounts to do just this, but for those of us who want to make sure our interest works for us rather than against us, credit cards can help fill in the gaps in your budget and optimise your spending habits.
The best way to integrate your credit cards into your budget is to factor in your credit card limit as a buffer spending limit between your paychecks and the date that your next credit card statement will be issued. This calculation can easily be conducted manually or you can use digital tools like ASIC’s MoneySmart Budget Planner to help track your spending and ensure that you’re not overspending due to the convenience of credit.
We also recommend setting specific budgets for different spending categories and reading through your credit card statements every month to make sure you’re staying firmly within your credit limits. This approach not only helps in managing expenses but also in accruing rewards on necessary purchases without leading to debt.
The Benefits of Credit Card Rewards Programs
Speaking of your credit card rewards, it goes without saying that the majority of us end up signing up for a credit card because that card offer provides two key benefits:
- It has a competitively lower interest rate or a generous interest-free period, and
- It has a great rewards program with perks that you can actually use.
The importance of selecting a rewards program that boasts perks that you can actually use cannot be understated. After all, you can only really get your money’s worth if you’re actually redeeming all of the offers that are available to you. So making the most of your rewards programs begins with ensuring that you’re opting into the right programs for you.
For instance, if your rewards program offers perks like free flights, shopping vouchers to your favourite retailers, or cashback rewards for consumer goods that you’re likely to purchase frequently (i.e. camera supplies or pet supplies), then you can expect that rewards program to be a good fit for you. Contrastingly, if your rewards program offers discounts to luxury retailers that aren’t your style, then those rewards are likely to go to waste. And if you can expect hundreds of dollars’ worth of rewards to go to waste every month, then what are you paying for besides the convenience of credit spending?
Balance Transfer Credit Cards
Although most consumers will narrow down their credit card offers by looking at the two key benefits we outlined above, there is one other element that savvy spenders may consider when looking to apply for a new credit card – particularly those spenders who may already have a credit card or two in their wallet. We are, of course, talking about balance transfer credit cards.
Balance transfer credit cards can be a powerful tool in managing credit debt. These cards allow you to transfer existing credit card debt to a new card with a lower interest rate, often 0% for an introductory period. By allowing you to transfer existing credit card debt onto a new card with potentially lower interest rates, these unique credit cards can provide much-needed relief and an opportunity to pay down your debt faster.
However, balance transfer cards typically come with limited period terms, including the length of the low-interest period and the rate once it expires. Being aware of just how much time you have before those introductory interest rates expire is vital to getting the most from your balance transfer card.
You should also be aware of any transfer fees prior to signing up for your balance transfer credit card. For example, if you’re transferring a $5,000 balance to a card with a 0% introductory rate for 12 months and a 3% transfer fee, you’ll initially face a $150 fee. If you can pay off the balance within the year, you’ll save on interest, but failure to do so could see you paying higher interest rates than before.
Finding the Flexibility in Your Credit Spending
So there you have it – the top considerations you need to make and information you need to equip yourself with when looking to attain greater flexibility with your own credit spending. Remember to stick to your budgets religiously and reassess them routinely to make sure that you’re getting the very most out of your credit cards. Revisiting your card contracts or even shopping around for additional credit card deals will also help ensure that your credit spending stays robust and consistently aligns with your budget and lifestyle.
And most importantly – if your credit card debt ever becomes overwhelming, then don’t hesitate to seek professional advice. Financial counsellors can provide guidance on managing debt, negotiating with creditors, and creating a plan to regain financial stability. Services like the National Debt Helpline offer free and confidential advice to consumers struggling with debt.
Credit cards offer a world of convenience and rewards, but they also demand responsibility and discipline in spending. By understanding the intricacies of credit spending, budgeting effectively, wisely utilizing balance transfer cards, and managing multiple cards, consumers can enjoy the benefits of credit without falling into the pitfalls of debt. Remember, responsible credit use is a key component of financial health and freedom.