Manage your credit cards and make money
Published: Sunday | February 1, 2009
Proper credit-card management, apparently, requires nerves of steel and depths of discipline akin to that used by the sportsmen and sportswomen to achieve outstanding athletic feats. If you are not possessed of such qualities, you perhaps should be thinking twice about using high-interest plastic.
Even before the bill collector begins calling, you should know that misuse of the credit card can negatively impact such major projects as home purchase, even motor vehicle acquisition or any other asset bought with personal loans. Poor credit management will lead a mortgage lender to turn down your application, and no bank or car dealer will finance your auto purchase if their checks reveal credit-card abuse or mismanagement.
"If you are one of those persons who pay only the minimum amount due on your credit card each month, or if you send in only a small contribution towards the principal balance, then you are most likely in over your head," says Dorothy Campbell of the Consumer Affairs Commission (CAC).
The people who tend to use credit cards to 'cover the gaps' in their underfunded lifestyles are destined for trouble, according to Campbell.
In theory, you can reap value from the credit card through prudent spending and pulling down on reward points allocated for proper usage.
Elena Villafana-Sylvester of Scotiabank Jamaica notes that small business people and others use cards for cash-flow management, as it allows them to buy the materials or pay the bills when they need to pay.
The rewards system at Scotiabank, says Villafana-Sylvester, includes the Magna points awarded several times a year, which some people actually save and use for shopping in December.
National Commercial Bank also provides rewards, special interest rate loans and air travel benefits to those who are wizards at card management.
Joan Edwards, a financial adviser at Jamaica Money Market Brokers in Kingston, says holders of plastic can actually make money by using credit cards wisely.
This can be done by investing the funds from your salary that you would use to pay for these expenses in an interest-bearing account, not where your interest is calculated daily.
While you use your credit card to pay for your expenses your own money will be working for you.
"Your credit card bill is usually due 30 days after you use it, so the money you invested would earn interest for the 30 days before the credit card payment is due," said Edwards. "So you make money from the interest earned."
Placing your salary of, say, $30,000 in a money market account yielding 10.32 per cent per annum would earn $254.47 before tax.
Compare this with interest charges of $1,109.59 on a 45 per cent interest-rate credit card for paying your credit card late.
In order to benefit from these earnings, you need to pay off your total balance on your credit card - before the due date. So, make sure that you get the dates right.
You should never spend more than what you can pay for in full in one month.
"When you can't afford to pay off the balance in its entirety, it's time to cut those cards and approach the amount like a major loan," said CAC's Campbell.
"Make every effort to pay some money towards the outstanding principal."
A person with $5,000 in credit card debt that makes the minimum payment of just $200 per month, she adds, will end up spending more than $8,000 and take almost 13 years to pay off that debt.
"Credit cards are not your friends," said Campbell. "They cannot hold you when you are feeling down or make the cobwebs in your head go away after partying all night."
If you cannot be disciplined in using the cards, it's time to get rid of them.