Credit cards are probably one of the reasons why many Filipinos are miserably in debt.
I actually have some friends who consider credit cards as “evil” and swear that they will never, ever get one.
Do you feel the same way?
Personally, I consider credit cards as one of the best tools for leveraging money – but if and only if, you have the financial discipline.
So what’s the right way to use a credit card?
Let our guest blogger for today, Carlos, tell you, through his credit card story below.
About seven years ago, I really didn’t like credit cards. I had a lot of reservations about having one; which other people shared. Instead of cutting you off when you go over your credit limit, they just increase the limit. And when you can’t pay on time, they charge usurious interests and fees. But the biggest factor for me was I saw first-hand how you can get harassed by collectors when you couldn’t pay on time.
I definitely did not want any part of that, and resolved to never get a credit card. (Though it somehow escaped my attention that my dad had not one but two credit cards and was never getting harassed nor suffering any of those other drawbacks.)
But that changed when one day an agent somehow managed to get into our office. He offered a credit card. And as is common, there’s a “reward” just for signing up. But instead of free coffee, the reward was a sign pen. And a sling bag. And a trolley bag. Plus the usual waiving of the annual fee for the first year.
So of course, I and my office mates got to thinking. I sign up, cancel within the first year, and then keep the free stuff. So I and an office mate signed up for one.
I eventually got my credit card. But days after that, the free stuff still didn’t arrive. My office mate took the initiative and called the credit card company. That’s when we found out that the free stuff wasn’t really true. The agent lied just to close the sale. (I should’ve known it was too good to be true, right?)
We ended up keeping the credit card anyway, just in case it could become useful (after all, the first year was free). I never used it for the first year. In fact, I rarely saw it that first year that I forgot to have it cancelled. Already in my second year, I decided to keep it since I was going to be paying an annual fee anyway.
At that point I figured I should use it, again because I was paying for it anyway. So I started using it for groceries.
And that’s when I realized something. I wasn’t being over-charged; there were neither interest nor additional fees. No one was calling me up at odd hours, pressuring me to pay. And my credit limit wasn’t magically getting higher either. With the things I feared not happening, I got more comfortable with using my credit card. I learned that if I spent wisely, it was actually a convenient thing to have.
And when I wanted to buy my dream phone, I used my credit card to pay for it. I was careful to check that I could afford the monthly installment. But a few months after getting my phone, with the I-have-a-new-toy feeling wearing off, I was still paying the monthly installment. And it was money I felt was basically being thrown away since I wasn’t getting anything more for that payment. Sure I had my phone, but my giddiness for it had worn out. All I was left with was a bill I could comfortably pay, but consistently eating up my monthly budget.
After that I resolved never to buy anything on installment again. I’d save up first and then buy.
So after a few years and I wanted to buy a smartphone, I saved up for several months, and allocated a portion of my 13th month pay for it. And since I wasn’t paying by installment, I ended up paying less overall (it didn’t have a 0% installment plan).
And that’s when I really felt my credit card was an advantage. I could use it to buy high-priced (but within my budget) items instead of withdrawing and then carrying a large amount of money – and suffering the usual anxiety about getting robbed or misplacing the money.
And I could even pay it online, thereby avoiding the long lines at the ATM.
In fact that’s what I do now. Once a week I withdraw a small amount, just enough money for fare and lunch money. All the rest of my expenses are paid through my credit card. And to make sure I spend wisely, I pay it online right away – within the same day, sometimes just hours after the purchase. I’m never afraid of getting robbed, since even right after withdrawing there’s just a small amount of money in my wallet.
And the best part? I get rewards points. Before, I was accumulating miles for airfare. Now, I’m thinking of switching to a card that gives rebates on grocery purchases (one gives 3% rebate for any store, the other 5% for one particular store). I estimate that by doing so I could save as much as 5,000 pesos by the end of the year.
And 5,000 pesos is actually enough money to invest in a mutual fund or UITF. So instead of not using and even being afraid of my credit card, it can now actually help me save and prepare for my future.
This guest post is contributed by Carlos, an IT professional and newbie investor currently dreaming of being an entrepreneur. You can visit his blog entitled, The Personal Finance Apprentice.
Having a credit card can be a good thing – and if you want to train yourself on how to properly use one, just do this simple tip:
Every time you use your credit card, take out the exact amount from your bank account and put it inside an envelope. So if you swiped P1,000 on your card, then as soon as you can, but not more than 24 hours later – withdraw P1,000 from your ATM and keep that money in an envelope.
When the credit card bill comes, take out the money in the envelope and use all the money you “saved” there to pay your entire due amount.
That’s actually how I trained myself to use a credit card, and if it worked for me, I know it will work for you.
Read more articles about credit cards, check out: All About Credit Cards
Receive more money smart stories by subscribing to Ready To Be Rich.