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Credit Cards - the joys and perils of owning

Updated on April 8, 2016

The plastic card

The credit card is probably the most beautiful plastic card in your pocket
The credit card is probably the most beautiful plastic card in your pocket | Source

Credit Card as a transaction enabler

A credit card is very convenient for settling bills, however there are negative connotations attached to the use of credit cards.

This article will discuss first the benefits of credit cards and then address issues that cause a lot concern.

There are three ready ways to pay for goods and services that we will discuss this article. The article is targeted to personal consumers.

A consumer can use the following methods to settle her bills:

  1. Cash payments
  2. Direct demand on her bank account using debit card or cheque
  3. Credit card payment.

Of the three, credit card payment has the best advantages.

  • Cash

It is inconvenient at several levels to carry cash to meet our transaction needs, for online payments it is just impossible to use cash or cheques.

There are costs associated with withdrawing cash such as travelling or ATM costs for cashing on non network machines. A significant fact is that cash in the wallet does not earn interest.

Using cash to buy gadgets like TV, computers and cameras does not leave transnational record. It is easier to get follow-up on credit card purchases than on cash sales. Unless the buyer wants anonymity - and this a very dubious argument for cash transactions.


  • Cheque

I will not dwell much on cheque transactions except to to say that most merchants do not accept personal cheques - and they don't offer explanations. i will do so for them.

A cheque is a promise on the issuer that the merchant will be paid upon presenting the cheque at a future date. The buyer may already have left town. Simply put, few are buying their coffee fixes with cheques these days.

  • Credit card

This is the most convenient (to the buyer and merchant) form of payment for most personal transactions. There is no carrying costs associated with credit cards (admitted there is an annual fee - but this is fixed and spread across all transactions).

Credit cards removes the need for consumers to carry exact amounts of cash. Another advantage is that consumers flexibility to spread their expenditure irrespective of income dates.

Credit cards starts to charge interest two months after the transaction because they close the monthly transactions once a month and they also offer a grace period.

The advantages of credit cards can only be enjoyed if their transnational efficacy is understood.

A theme that will be touched throughout this article is that credit cards are not to be used as a credit source.

...and now to the perils... but we will have two side bars of the joys of credit cards...



Credit Credit Promotions

I have access to airline lounges even when i travel economy class courtesy of my platinum credit card.

If you have traveled business class you must know the world of differences between spending three hours loitering in the airport versus sitting in the business class lounge. Business class ticket is expensive, but there are several ways to sneak into the airline lounge, your credit card is one of those.

Some of the benefits that credit cards offer are:

  • Access to golf courses, may be once a month
  • Pick-up and drop-off from airports
  • Valet parking at selected hotels
  • Roadside assistance
  • In general there is a two months period before interest start to accrue retail purchases
  • Periodic cash-backs
  • Air-miles - i use mine to pay for my mobile phone bill

Credit Card companies have reward and bonus plans

For illustrative purposes only. Credit Card companies have a lot bonus and reward plans.
For illustrative purposes only. Credit Card companies have a lot bonus and reward plans. | Source

How do credit card companies make their money?

Credit card companies make their money in 4 principal ways listed below:

  • Merchant fees - this is why there is a reward and bonus systems that ironically benefits the rich and well informed
  • Interest - if you are wealthy and well informed credit companies will not charge you interest because you pay on time
  • By selling your data to other marketers
  • late payment charges and other penalties

Yes, the merchants pay around 1%-4% of retail prices as a fee for the benefit of the credit card facility. Merchants are prohibited from pushing this back to credit card users.

And yes credit card companies have lots of information on consumer behavior, they sell this to other marketers, think Big Data.

Credit card interest rate is way above above savings account interest rate, remember credit cards are not a primary source of credit.

Managing credit cards

Many a person with credit card debts has asked, 'how did I get here?'

'how did I get here?'

This is how ...

You applied for a credit card, or two. Soon after you got your first job you were asked to open a bank account so your salary could be deposited. And so you rushed to the nearest bank.

Cutting the long story short: you then signed a lot of bank papers over a cup of coffee. It only took 15 minutes.

As you left the bank this is what you signed for:

  • the checking account (which was all you needed in the first place)
  • two credit cards (these were offered as a favor)
  • the two credit cards came with a lot of terms & conditions - (did you read the small print?)

It is not the bank's responsibility to teach you basic banking. I believe that it's your grandmother's role to teach you etiquette, including financial etiquette. Or you can read on...

Basically that is how you got here.

Money to spend

If you belong to the 99%, chances are you have a job where you get a weekly or monthly paycheck. A bonus may or may not come. This is your income. We can call this PAYCHECK if you will allow.

And then there is the Credit Limit.

The credit card company allows an upper limit that you may and can spend without you calling anyone. This is called the Credit Limit.

Money Available for you to Spend = PAYCHECK + CREDIT LIMIT.

This is a source of a lot of misunderstanding. At anytime (before you max out) you are allowed to spend above your income. Without notifying your grandmother, nor the bank nor your spouse.

But the bank will know, and to them it is business as usual.



Credit Cards as convenience

The credit card is a very convenient form of payment
The credit card is a very convenient form of payment | Source

Proper use of credit cards

Proper use of credit cards starts from understanding two points:

  • the amount shown as 'available balance' is 'available balance' only. It is not your money.
  • should you decide to use the 'available balance' anyway as if it's your money, there is a price.

The credit card is good for bill settlement and not as a financing instrument. Now you know.

This is how it works.

You want to buy a book on technical writing for your writing career. For that you must use your money, just as if you were buying a yacht. The same if you were paying for coffee or lunch.

In general we buy and pay for things to enhance our lives. Either consumption items like apples, entertainment like a night out with the boys, or assets to help us live a better life. Some assets will help us to earn money in the future.

Whatever we buy must be within our means and in the case of assets must be profitable.

It is irrational to buy an asset if the expected earnings from its utility is less than than the cost of buying it.

Once the decision to buy a product or service is made, then there is the small matter of exchanging value between seller and buyer.

The credit card is a convenient way of exchanging money. Unfortunately it is not a cheaper way to finance the purchase.

Credit Card Security

Know how to secure your credit card information
Know how to secure your credit card information | Source

Does the number of cards matter

How many credit cards are too many
How many credit cards are too many | Source

Easiest way to settle bills

The money in your credit card is technically not yours
The money in your credit card is technically not yours | Source

That coffee is against your income

Yes, you can pay for that cup-o-coffee and bun for the next seven years
Yes, you can pay for that cup-o-coffee and bun for the next seven years | Source

Point of minor clarification

To spend money on anything - on Starbucks coffee, on movie tickets or on training; you must have a source of income.

And a credit card is not a source of income, it is a method of payment - just so we clarify this minor detail.

Pay your bills on time

Set a schedule to look at your financial state of affairs - at least twice a month
Set a schedule to look at your financial state of affairs - at least twice a month | Source

Pay Your Bills (On time!)

The biggest source of financial ruin is failure to pay bills on time.

Financial institutions have legal rights to charge for late payments and other issues like over limit positions.

It is natural to look away from worries and live your life. That is well and fine with other minor social issues. Personal finances is a practical subject.

Set aside time to manage your finances. At least twice a month, one week before your pay-day to plan and then a few days after pay-day to pay your bills.

Involve your spouse so that you both have the same expectations.

Read through the credit card statement and ask yourself questions. Once I queried the bank and they reversed a bank charge.

A few bullet points can illustrate:

  • Late payment not only attract punitive banks charges, it is also illegal and will affect your credit rating.
  • Banks make errors and you must read line by line (and they are open to negotiate and they may reverse some charges)
  • You can rearrange your positions for the better, by for example transferring balances from your current account to your credit card. This may reduce your overall cost of debt.
  • You get motivation to settle your debts if you know your financial status

Set aside time to manage your finances. At least twice a month, one week before your pay-day to plan and then a few days after pay-day to pay your bills.

Involve your spouse so that you both have the same expectations.

Read through the credit card statement and ask yourself questions. Once I queried the bank and they reversed a bank charge.

— Author

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