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How does a credit card work as a source of finance?

Updated: Jan 17

In this post, I will be talking about the benefits of using credit cards to bolster my finances and help me save money as well. It is important to understand, that even though credit cards can be useful and have a purpose, they can also be harmful and negatively impact my financial health if used incorrectly or irresponsibly due to consequences to my credit score, financial stability, and eligibility for future credit.


Paying using a credit card
There are many benefits to using a credit card as part of your financial plan

Why should you use a credit card instead of a debit card?


Credit cards have earned a bad reputation over time because many people do not know how to use them correctly and are irresponsible with their finances. Credit cards are just a financial tool that can be used in many different ways within one's financial journey. If used correctly they come with many benefits. Used incorrectly can negatively impact someone financially more in the long run than the benefits they provide.


Credit cards are basically like small loans you can take out to purchase items. These small loans need to be paid back usually every 45 days or so, depending on the billing cycle. These loans are usually interest-free for 45 days, or the duration of the billing cycle if they are paid back in full and on time. Otherwise, a hefty interest fee will be charged on the amount outstanding which can quickly lead to a debt spiral. Name another place where you can get such a loan interest-free for everyday purchases!



Benefits of using credit cards


  1. Convenience and Accessibility: Credit cards provide a convenient and readily accessible form of finance. They can be used for in-store and online purchases, making them a versatile payment option.

  2. Emergency Funding: Credit cards can serve as a financial safety net during emergencies when immediate cash is needed. They provide a quick source of funds to cover unexpected expenses such as medical bills or car repairs.

  3. Rewards and Perks: Many credit cards come with rewards programs, cashback incentives, or travel perks. Responsible credit card usage can allow cardholders to earn points or cash back on everyday purchases, providing additional value over time.

  4. Building Credit History: Properly managing a credit card can contribute positively to your credit history. Timely payments and responsible credit use may help improve your credit score, which is crucial for future loan approvals and favorable interest rates.

  5. Grace Period for Interest-Free Borrowing: Credit cards often come with an interest-free grace period, typically lasting between 21 and 25 days. If you pay your balance in full by the due date, you can avoid paying interest on your purchases.

  6. Online Security: Credit cards generally offer enhanced security features for online transactions, providing an additional layer of protection against fraud compared to other payment methods.

  7. Credit Building for Future Loans: Responsible credit card use can help individuals build a positive credit history, making it easier to qualify for larger loans, such as mortgages or car loans, in the future.

  8. Trackable Expenses: Credit card statements provide a detailed record of your spending, making it easier to track expenses and manage your budget. This can be especially beneficial for financial planning and identifying areas where you can cut costs.

  9. Cashflow benefits: Purchases made using a credit card can free up money due to the interest free period, that is available in a bank account to be used for other purposes such as reducing the interest of a home loan by use of an offset account. Having that money available for business use by making it available to pay suppliers or contractors. Or the money can be used to invest in short-term assets such as the stock market. This can be risky but also very profitable. No margin calls to deal with either. Finally prevents the need to take out personal loans for short periods of time at a higher interest rate. Also, personal loans take time to be approved and require a lot of paperwork.


Credit cards also provide many other benefits such as


  • Free travel insurance: Many credit cards offer free travel insurance as part of their package. This can be used in most countries around the world and offers basic insurance for travel and some other protections. It's important to read the terms and conditions to see if the coverage is what is desired.

  • Fraud protection: Some credit cards offer great protection against fraud or lost money. Because the money is the bank's, it's in the interest of the bank to retrieve the money that has been lost or stolen due to fraud or theft.

  • Purchase protection: This allows a consumer to file a claim with the credit card issuer to receive a replacement, repair, or reimbursement for any eligible stolen or damaged items. Major credit card networks, such as Mastercard and Visa, have different policies for purchase protection. Some even provide their customers with a refund on the price difference greater than the depreciation of a stocked item still sold.

  • Cashback: There are some credit cards that also provide cashback on all times purchased using the credit card up to a certain percentage. This basically makes every item cheaper saving you a lot of money over the year.



Conclusion


Just like every good financial plan, a credit card can have its place as a source of finance. While credit cards offer several advantages, it's crucial to use them responsibly. Carrying a balance and making only minimum payments can lead to high-interest charges and potential debt. It's important to pay attention to interest rates, fees, and terms associated with credit cards to make informed financial decisions. If you have any concerns please talk to a licensed financial advisor to discuss your personal circumstances.


For more information about which credit cards are the best to apply for and how to credit card churn safely and efficiently look up my guide or how I got started here.


Like always, if you have any questions, please comment below or contact me. If you don't want to miss out on any new content, then follow me on Instagram or Reddit for more information about everything to do with credit card churning and point collecting.



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