Credit Cards are Good

Credit Cards
Credit Cards are Good

There is a certain perception due to the FIRE (financial independence/retire early) revolution that all debt should be avoided and only cash should be used. I am all for living debt free and believe that it enables you to perform well financially and make better decisions when starting to gear investment returns. The only difference is that credit cards should not be seen or used as debt instruments. If you are already on the FIRE bandwagon you probably already view wealth in a different way, while having the lifestyle and discipline to save a large percentage of your income. Taking the same approach with credit cards make them really good.

Why are credit cards good?

There are many reasons why credit cards are good. If you are looking for the best credit cards there are also many resources to assist, especially in the US. I will cover some of the basic principles why they are good and the most usable ones in your daily life.

In any business there is a cost to having cash in order to buy stuff the business requires. In most cases a business looks at its weighted average cost of capital (WACC) to see what it costs the business to have capital. As the capital could have been used somewhere else to generate a return. It is important to understand this value when making investment decisions or looking at endeavours that require high working capital. For example, getting a large new client who only pays 90 days from invoice. You will require working capital for the first 90 days in order to run the business; and someone will have to fund this, at a cost…naturally.

Your personal finances are exactly the same. The only difference is any “straight” transactions on your credit card has no cost to it within the grace period. These periods vary anywhere between 21 and 60 days depending on country and credit card provider. Mine is 50 days which is far higher than most developed countries. The simple fact is these grace period days provide free cashflow. This means any money that would have been used for purchases can be invested until your credit card is due. Historically there was sometimes discounts if items where bought cash instead of using a credit card. With the advances in fees and credit card transactions this is almost totally a thing of the past, so use that free cashflow to your financial advantage.

The other advantages that are really key for me are the credit record building and reward schemes credit cards offer. In some countries credit records are very formal and important to build. Using a credit card wisely is an easy way to score some credit record points and potentially attain cheaper rates on things like mortgages. Reward schemes is one of those financial hacks which can be compared endlessly especially in places where credit cards are easily obtainable. One of my US friends have a Banana Republic credit card (not reward card) which can be used for any purchases like a normal credit card. This was something very strange for me as a South African. But it comes back to the potential benefits derived from using the card. Understand the rewards you can get for example: simple cashback, alternative online currencies, discounts at certain stores, discounts from large purchases within a certain period, etc. These are easy savings and if used properly and with a bit of planning should outweigh your annual subscription fee (or sometimes the rewards can pay the fee).

How do I have good credit cards?

The way to have credit cards work for you is not to see them as credit cards. They are purely cashflow instruments and the limit of the card in not money that is actually yours to spend. I recently received a credit card as part of my banking package, I asked the bank to reduce the limit to one third of what it was. I am not easily tempted but I do not like that much available credit. I have not done one transaction on it as the reward scheme is average, but I can visit airport lounges for free with it. As part of seeing credit cards as a cashflow vessel remember to never buy on “budget” (the monthly instalment option) but always on “straight”.

However, the key to having good credit card(s) is to pay your credit card(s) on a cyclical basis in order to never pay interest or affect your credit record. There are various ways to do this but these are my favourite:

  • If your grace period is long enough fully pay your credit card balance on a monthly basis or similar depending on when you receive your paycheck. This is how I do it, I basically see my credit card balance as a variable bill. I know some months is higher than others depending on my purchases but I pay it like I do any other monthly bill.
  • Set reminders to pay off your credit card. This can be done at the start of your grace period for the period or something like twice a month depending again on your grace period. This allows you to maximise the free cashflow and potentially pay in smaller amounts at a time. There are also some options where this can be done automatically.
  • See you credit card as a positive value. In some cases, credit cards provide nominal interest on positive balances. The concept is to check what your average monthly expenses is and put that money upfront into your credit card. For example, if this is $1000, put that into your credit card. As you start buying this amount will reduce and when it gets to zero, you can top it up with $1000 again. The advantage is that the positive balance will attract interest while you can enjoy all the credit card reward benefits. It is an initial outlay of your working capital but at least it earns interest. This is also a peace of mind solution which offers all the available credit as a potential emergency fund.

How do you see credit cards and what is your tips to use them for the good of your financial wealth?

Always grow your wealth for tomorrow while being content with your wealth today.

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