How to Properly Use a Credit Card

When my friend told me that he took my advice and found the advantages of using a credit card for every purchase, I realized that I must share this advice on here. I've seen many people who owe thousands of dollars on credit cards. I can not fathom how they have put themselves in such a worrisome position.

A credit card is the best personal finance product available to consumers. It is essentially a product that pays you to borrow from them at an interest-free rate. The problems that arise from overusing a credit card is a result of a lack of education and discipline. So here's the advice and information I tell my friends.

First and foremost, use a credit card only when you would make a regular purchase in cash or debit, such as lunch or groceries. This avoids large debt. There is no advantage in using cash or debit, so put it on the credit card and keep your money in your bank account. In theory, that money in your bank account will earn interest for you. If you do receive a discount when purchasing with cash, make sure that the discount per cent is greater than your bank account interest rate. In today's low interest rate society, any discount will do.

Secondly, most credit cards, even annual-free credit cards, will give you "cash back" on purchases. The range can be as high as 2 per cent to as low as 0.5 per cent. Take advantage of this. The cash back rewards can total up to hundreds of dollars per year. Don't forget that this "income" through the cash back program is also tax free because it is a penny saved versus a penny earned. Saving $10 on a purchase is equal to earning approximately $14 at a job, so don't ever undervalue a few dollars saved.

A third tip is to find out the billing cycle of your credit card. Mine is the 14th of every month. So if I were to buy something today (Oct 13), it would show up at the end of this month's bill. If I postponed it to tomorrow, it would show up in next month's bill, pushing the debt to a future date while earning about 47 days of additional bank account interest. This was also a tip my instructor told me during my college days. It is great for financing non-essential items that can be purchased at a later time.

The fourth tip is to pay the credit card on the required pay date, never before. By paying days earlier, the money in your bank account will lose potential interest. Just make sure you don't forget. Most credit card companies give you a grievance period before they will charge you fees or interest anyways, but make it a good habit to pay on the day. Set up a reminder or have a post-dated payment from your bank account.

The last tip is really a summary of the first tip. Use the credit card only to replace common purchases and for emergencies. Personally, I use my credit card mainly for lunch, gas, and my cell phone bill. With a few other purchases for entertainment, my credit card bill is very consistent, which makes life easy because I don't need to keep track of my purchases.

If you happen to be someone with spending problems, start by ensuring your total credit card purchase per day is less than the amount you make at work per day. Once that becomes habit, alter it to the disposable income per day through basic calculations. Maybe talk to a financial advisor to determine this value for you. If you can follow my above tips, you should be spending your credit card at most twice a day which should never put you in debt. You will even profit, tax-free, from it too!