Smart Financial Management – Part 2

From the previous article, we have covered the key elements of SMART Financial Management. Getting the basic financial management knowledge and practicing it right from the start is critical in working our way towards Financial Freedom. In SMART Financing dictionary, invest means to make or grow your money in a meaningful way via OPM (other people’s money). Banks offer various types of credit facility for customers. If managed wisely, we can actually leverage on some of these credit facilities to grow our wealth. In this article, we would like to share some tips on one of the most commonly used credit facility – credit card.

The most commonly asked question is whether credit card a boon or a bane? It will end up being a bane if you spend without proper planning and end up paying more interest than earning the benefits. However, this plastic money can be a boon if you can control the credit facility towards your own benefits. Below are examples of how you can leverage on credit cards.

Sign up bonuses

Often, banks offer lucrative offers just for a credit card sign up. There are typically 3 stages where you can benefit.

At point of signing up: At this stage there is normally a small value premium gift just for you to sign up. This can be in the form of vouchers or an item.

Upon your credit card approval: Banks want you to start using the credit card as soon as possible. They do not want to give you a plastic to be left in your letterbox or stored in the card holder for emergency use. Some banks offer reward for card activation, while some banks reward when you start spending.

After activation: Banks are in the business of getting you to recur usage on your credit cards. Often it is done via frequent engagement plans to get you to spend more. High value rewards, like cashbacks, are offered when you meet certain spending criteria.

Earn up to 59 days of interest free period by using your card

When you make a purchase using a credit card, you are given an interest free period of 20 to 59 days, depending on the transaction date. By choosing to make more purchases with your credit card, your money stays in your savings account or fixed deposit and earn you interest. Meaning, you’re earning interest on the money you’ve already spent. You most certainly cannot do this with cash!

This is especially beneficial when you make large transactions.  Putting in a down payment for a property or a car using your credit card can give you handsome rewards in return. It is a timeline game. If you time your larger transactions at the start of the statement, you will earn more interest on money spent.

0% Instalment Plans

Some retail shops allow you to charge your purchases and convert them into 0% instalments plan of up to three years. This means, you can split your purchases into equal monthly instalments over the period and pay no interest for that purchase. This is done at the point of purchase. You normally need to look out for these sort of promotional signage at the payment counter or by asking the cashier. Don’t be afraid and ask! Do take note that every retailer is different. Some will look into credit cards offered by certain banks and some will look into tenures offered. Most of the time, retailers would not place a minimum amount for such transactions.

All you have to do after making large purchases is to save that same amount of money in your fixed deposit or savings account. By the end of the tenure, the interest you’ve earned is your profit.

Credit card debt consolidation

Here are some simple money making tips from such debt consolidation programmes (normally called Balance Transfers).

If you some have outstanding balances with other banks, this is a great opportunity to consolidate the various credit card balances you have into a 0% interest rate installment loan of up to 12 months or more under the balance transfer plan. The money that you have can be kept in the savings account longer to help you earn some interest.

Credit Card Reward Points

Most credit cards offer reward points when you spend. The accumulated reward points can be converted to cash value for subsequent spending. Some banks offer fast track reward points, which basically grants you between three and 10 times more rewards if you spend in those categories. Redeeming a cashback or voucher which normally requires a spending of RM20,000 to get 20,000 points, for instance, can be fast track way to earn reward by spending RM4,000 to get the same 20,000 points if you meet the needed requirements.

Cash Back on credit card

“All the above are a hassle to me because I am forgetful?” A simpler but less lucrative way to make free money from credit card is by using a cashback credit facility and paying it off in full every month. Different cards offer different cashback rates. Some offer a high introductory rate that reduces over time, while others offer higher rates on certain spending. So, make sure you get the card that best matches your shopping habits.

Merchant discount on selected retailers

Banks are very competitive. In order to make their credit cards more appealing to consumers, banks generally offer merchant discounts. Meaning, if you use their credit card in a listed store, you will get extra rewards points, upfront discounts or end-of-bill discounts. For example, some banks offer rewards like complementary tickets or immediate discounts when you watch movies at a particular cinema. Again, you would not be able to do this using cash. Cash is king? Maybe not in this case.

Avoid the below!

Do not revolve on your credit card as you may be charged up to 18% interest per year!

Do not withdraw cash over the counter or through your ATM

Do not go over your credit card limit

Most cards charge a penalty if you breach your credit limit. Also, it will affect your application or credit bureau scores when you apply for a new facility in the future. This is also a reason why applicants get their loans rejected just because they have gone over the limit on one single card, even when  they have zero utilisation on all the other cards owned.

Credit card is a double-edged sword. You stand to gain from it if you manage it wisely or become a slave to it if you falter. Use it with care to reap its benefits.

Stay tuned to our next SMART financial management tips where we leverage SMARTly to financial freedom.