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Credit card debt is a global problem that has led many to the poorhouse. However, with smart management, credit card debt can actually be a good thing. Let’s look at how to have smart credit card debt that will help your finances instead of hurt it. The premise may be a little odd to some people, but there is a way that you can use your credit cards to improve your credit rating and start investing in your future.
First, it is important to realize that credit cards are not free money – this is a problem that affects many when they get their cards for the first time. They run out and run up the balance until they are completely maxed out. The secondary problem with this is that many of these same people will make only the minimum payments on those cards. Suddenly, they are in way over their heads and it could take decades to pay off that debt, depending on how much it is.
Now, let’s take a look at how to use credit cards in the smart way:
1. Never max out your card.
Set a limit for yourself and don’t use the card limit as a guide. (How A Credit Card Limit Is Determined.) You should never have a credit card balance that is greater than three months of your current salary. Less is definitely more when it comes to credit cards. Strive to have a balance of less than $100 on most of your cards. Put aside a special card for emergencies and keep a bare minimum of debt on that card to keep it open.
2. Make monthly payments higher than the minimum amount.
This is an easy way to eat away at your debt and keep your credit rating high. Making regular payments is the best way to achieve a good credit rating, but making higher payments will also help. You should also putting a charge cap on your cards, and try to never spend more than you will be paying for the payment each month.
3. Use your credit cards to make good investments.
So many of us use our credit cards for frivolous items that will only lessen in value. If you took that same amount of money and used it to invest, you would actually start seeing a return. Suddenly, your credit cards are working for you and you’ve created a secondary income stream that can reduce your reliance on your paycheck. However, you should start small with your investments and make sure that the risks are as low as possible to avoid having this plan backfire.
4. Take advantage of low interest rates.
Look for credit cards that have a very low introductory rate and then a permanent rate that is fixed and low. These cards are much more beneficial. You need to also make sure that you make those monthly payments on time, since many cards do have an interest penalty if you are late. The lower the interest rate is, the lower your total amount of debt will be.
When it comes to credit cards, most of us think of them as a way to get things we really want right now. We may not actually “need” these things, but we sure do want them. Whether it’s a new couch, a new stereo or even a new wardrobe, we use our credit cards faithfully at the behest of our wanter. However, there is a common issue affecting most people in today’s societies. Our “wanters” are out of control and they are wanting the wrong things. There is nothing wrong with having some new clothes, but there is a better way to use your credit cards that can actually result in you having more money.
It’s time to take your “wanter” to task and retrain it. Instead of focusing on material things that you cannot do without right now, let’s talk about focusing on your financial future. Credit cards can be, when used properly, a way to secure that future and open up new opportunities. Instead of wanting all of the latest gadgets, isn’t it smarter to start wanting the things that really matter, such as more income coming in? By using your credit cards as leverage, you can actually start making more money with varing degrees of upside, effort, and risk.
We’re not saying run out and run up your cards financing films or buying inventory for an EBay store. What we are saying is that by using that credit limit (how A Credit Card Limit is determined) wisely, you can start taking the steps towards some pretty nice returns. Pick the opportunities that best suit your skill set and risk aversion level.
A low risk opportunity is low interest balance transfer offers from your exiting credit cards or new solicitations. This is called credit card arbitrage. You borrow money from a credit card at a very low interest rate and you store the money in an interest bearing account. When the low interest period draws to a close you withdraw the money and repay the credit card keeping any interest earned. With interest rates lower than in recent times the amount of money to be made this way is negligible unless you have 50K+ in spare credit card capacity.
This is relatively low risk, assuming you pay the credit card back on-time and make the monthly payments. If you forget and miss a payment then you might lose all of your earned interest in a single rate hike and interest charge.
Buying stock on margin is another form of credit leverage. It uses stocks in your portfolio and line of credit to purchase more stock than could be purchased with just the funds on hand.
The key is finding that balance between willful and negligent spending and spending for the right reasons. If you don’t manage your money properly, you’re never going to get ahead. You’ll always be treading water and trying to make ends meet. By being smart about your credit card expenditures, make more money than you spend. That way you can have the spare balance capacity to make money using credit cards.
