As you can see there is a lot more to think about, when it comes to managing your debt, than just simply cutting up your credit cards. I remember slicing my final credit card in half because it was an extremely proud moment. Then one day I was asked if I was saving Avios points in order to reduce airfare? This was new territory for me. I did some research and saw that people were using credit cards so they could accumulate points that could be used in the credit card store.
I chose a British Airways American Express card because I do a lot of flying. I now purchase everything possible on this card so I can accumulate points. At the end of the each day I make a note of what I have spent and then move the money into an AMEX account through my online banking. This allows me to keep control of my current account expenditure and makes sure I always have enough money to pay off the credit card each month, avoiding any potential interest payments.
I chose the AMEX card because I fly a lot, but there are a whole host of other reasons why you may choose to use a credit card to make investments that will save you money over the long term. Great examples are football club credit cards such as Manchester United or Arsenal. MBNA are the main suppliers of these pieces of plastic and the APR is generally around the 17% mark, but you aren’t worried about this because you are always going to have money available to pay the balance off each month. Arsenal offer you money to be spent in the merchandise shop and Derby County even give you two free tickets to a game after your first free spends. In these examples I would certainly buy the Derby County credit card if I were a fan because I could cut it up as soon as I received the free tickets for the game. With the Arsenal card there is a danger that you are just using credit cards to gain money to use on materialistic crap that you don’t need. This is of course bad debt, so be careful.
Another reason a credit card is useful is to use it as a supplement to your emergency fund. I wrote about the importance of having an emergency fund when I read The TOTAL Money Make Over by Dave Ramsay. For those that missed it, it is essentially a fund that contains three-months expenses, and is only used as an extremely last resort. It is the creation of things like the emergency fund that keeps you out of debt. I use a credit card as a secondary source of emergencies just in case, for whatever reason, my three-months expenses are not sufficient. To make sure that the credit card is managed properly I have secured it in a block of ice where it rests in a friend’s freezer. I have done this because it gives me a lot of thinking time before I can eventually retrieve it.
So to recap…
1. Debt is divided into two forms: good debt and bad debt. Good debt is debt that puts money into your pocket, and bad debt is money that takes money out of your pocket.
2. Credit cards are an example of both good and bad debt. But if you have a sensible approach to finance then you can exploit them by buying credit cards that give you money off future purchases such as airfare.
3. Always make sure that the purchases are necessities e.g flight tickets for work.
4. Don’t buy unnecessary items just to earn points as this is bad debt.
5. Make sure you have a system established so you can pay the balance off each month. I use my online banking system and update it nightly.
6. Consider using a credit card as a secondary back up to your emergency fund. Keep it in a block of ice so it makes it difficult to access it unless it’s an emergency.
Do you use credit cards as a form of good debt? If so please share your stories with the readers.