Flexible Finances – Credit, Debit and Useful Debt

Say the word debt and it conjures up images of people with a financial burden sitting heavily on their shoulders. But this really shouldn’t be the case. There are plenty of debts that are actually pretty good value for money and that enable people to live a better life – take the humble mortgage for instance. People with a mortgage are homeowners – it’s a positive word. Much more so than “hey look at me, I owe the bank 150k” … which is another way of looking at it.

A well-managed credit card account can also offer you lots of benefits. For one thing, it’s safer than cash – and in most instances there are all kinds of security measures in place, making it increasingly difficult for anyone to commit fraud using your card’s number.

Before you open a credit card account, work out a few basic rules for how you will operate the account. Rule 1: making a large purchase? Look at other options for financing it first. Your bank may offer personal loans with less interest for that new car or holiday abroad. It takes a bit more effort to apply for a loan than to simply slap the credit card down on the counter – but can be a lot cheaper in the long run.

Rule 2: don’t go maximising the debt up to its limit and then pay the minimum repayment every month. It will take way too long to pay off. By all means use your credit card to help you out every now and then, but be sure to do so in away that means you can clear the balance over a short period of time.

Rule 3: be aware of your interest rate. These vary quite a lot. Introductory offers are often very attractive (e.g. 0% on purchases for a limited time) and well worth thinking about. But there will still be a credit card bill at the end of the month if you purchase on it, so keep an eye on the spending and the repayments.

Rule 4: always be aware that your credit card use is going to affect your credit card rating. Demonstrate to the provider that you can borrow and pay back, and they will likely respond by upping your credit limit. Conversely, missed or late payments will make you look like someone who hasn’t quite got the trust and reliability factors down yet.

Rule 5: be flexible in your finances. This means you can be assured that the buffer of your credit card and overdraft are there if you need them, while also ensuring that you don’t overuse them and end up with a minus number as your bank balance every month – not a nice feeling at all!

Rule 6: find a way that works best for you. If you clear your balance in full every month, then the interest rate is less of an issue. I often put all of my day to day spending on my credit card, then square up at the end of the month. This has two benefits. It means that the real money is sitting in the current account longer (earning me an admittedly tiny amount of interest) while my credit card is being used regularly, helping my credit file look nice and healthy.

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