By the sheer number of individuals owing money, credit card debt is by far the most common form of debt in the world today. It is so common that many people don’t even class it as a liability any more – something that was unheard of in your grandmother’s day. On the one hand, a credit card represents a great way to pay for everyday items, but on the other hand, it can be way too easy to spend more than you should. In any case, all your purchases are neatly tallied up for you at the end of every month, when you receive your account. The question is, should you pay your account in full (assuming you can afford to) or should you deliberately carry over a balance?
On first glance the answer sounds like it ought to be a clear yes – after all, out of the debts you may have, your credit card will undoubtedly be charged at the highest rate. Home loans come in at around 7%, personal loans and car loans at about 9%, while credit companies usually demand in excess of 20% on balances owing. And that doesn’t even include fees yet. But with some careful accounting, you should be able to take advantage of the interest-free period on your credit card – and come out on top.
In theory, it’s simple – let’s have a look. By carrying forward your credit account at no extra expense, you can instead put your income towards a mortgage or a car loan, thus reducing your active debts and lowering the total interest you will pay on those loans. It sounds good… and it can be good for your personal finance – but it takes some very careful accounting to not end up tripping over your own feet and ending up in a snowstorm of debt.
The interest-free period on most credit cards is a 40- to a 59-day window during which no interest is charged on your monthly account. When a company states you have “up to 59 days interest-free”, what they actually mean is that they won’t start charging interest until 59 days from the start of the contract month – so if the month is 30 days long, you will start being charged 29 days after the month has finished. Provided you pay your balance in full before those 29 days are up, you pay nothing extra at all, it’s essentially an interest-free loan. “Great!” many people are thinking.” “An interest-free loan – I could sure use that to my advantage.” Yes, many people can – but of course, the credit card companies make heaps of money out of gullible credit card holders who rack up enormous debt to them through non-careful management of this quick-to-go-wrong financial arrangement. And you don’t want to be one of the gullible ones!
Let’s just take a look at how this could work out to your advantage, if you can keep all the balls in the air and don’t fall behind with the interest-free repayments. Say your account has come in at $1200 for the month of March, and you have a 55-day interest free contract. You could pay it off straight away, but what if you hold onto your money for as long as possible? With 55 days from the start of the month you would have until the 24th of April to finalize payment – that’s a little more than 3 weeks.
You could keep your $1200 in an interest-bearing savings account. In 3 weeks it could earn about $5 depending on your interest rate; it’s not much, but over 12 months that’s an easy $60 that the bank won’t be collecting instead.
Pay off another loan partially or fully – but only if you are confident that you can make the money up again on time! Even a single extra $1000 payment into a typical mortgage can save you between $2000 and $3000 over the life of the loan. Do this several times, and you are well and truly winning.
Of course, this system relies on you keeping close track of your spending. So here are a couple of tips to help you keep a close track of the “money in, money out” in your life.
1. A Budget If A Must
The most basic form of money management is a budget, and everyone should have one – that includes you. Despite credit cards being a potential way to get ahead in some areas of your finances, they are still not a substitute for wise spending in line with your regular earnings. If you are constantly spending more than you earn, using your magic plastic card otherwise known as a credit card, and not even keeping track of the consequences, you will be an ideal candidate for spiraling credit card debt. Before you even think about getting a credit card and doing clever things with it, make sure that you are capable of keeping a thorough track of your earnings and your spending. What you want to see is that your spending never outweighs your earnings. If you want to use a credit card to make use of its interest-free loan potential, you need to be able to keep a basic budget first.
2. You’ll Need Impeccable Self-Control
Let’s not get too philosophical here, but a lack of self-control is one of the most common ways in which people get into credit card trouble, no matter how squeaky clean and sensible their original plans. Self-control means not whipping out and swiping the plastic without thinking. Sticking to your budget (see above) requires a reasonable amount of self-control and if you don’t trust yourself, maybe it’s a bad idea to be attempting to use credit cards to get ahead – maybe you should be paying off your debt in full every month after all, just so that you get off the credit card train as soon as possible.
Not Paying Your Credit Card Debt In Full Every Month: Is This Really For You?
Not paying your credit card debt in full every month in order to benefit from the interest-free period is only something that you should attempt if you are confident with money and with your own budget and finances. If in any doubt, just pay that balance off every month, and save yourself the potential headache and scary debts that you could end up with if you don’t play your cards right – literally! But, if you’re the sort who’s got every last cent mapped out per month, and you know you are earning enough money to actually cover all of your expenses in due time, then you can make use of this handy financial tool to your personal financial advantage.