There are many money gurus 👨🏫 out there that taint a very negative picture of the use of credit cards. And yes, misuse of credit card debt is one of the most common form of 'bad debt' and is the culprit to blame for many households' debt snowball.
This week, at Money First Aider, I am running a crash course on credit card use. Bitesized blog posts to help you maximise the benefit you can get from credit cards!
However in everyone's wealth building journey, credit cards can be a very important and useful tool to improve your credit score and gain access to many seasonal perks that improves your quality of life. The key is knowing HOW to use credit in your benefit, and not let it suck you into poverty or turn you into a money slave.
Before going into how useful and how dangerous credit cards are, there are some key principles surrounding credit cards you should know.
What is Credit?
In general, "credit" ➕️ is used to represent an increase in value or a financial gain, while "debit" ➖️ is used to represent a decrease in value or a financial loss.
Let say when you get paid at the end of the month, the money coming into your account would be called credit. Money taken out, will be called debit.
In terms of credit cards, 'credit' is basically borrowing money from a financial institution; and a credit card is just a card to take this borrowed money (credit) from such financial institution (the credit card provider). You have 'gained' money by borrowing it, hence they use the word credit; but becareful, this is borrowed money.
When you use a credit card, the credit card lender is lending you the money to buy what you want. You're then expected to pay back this amount, of course, plus interest, within a certain timeframe. However, if you pay back the billed amount on time, you won't need to pay the added interest on it. I.e. free money to borrow as long as you pay it back on time.
This is different from debit cards, which directly withdraw funds from your own bank account. Money is taken out directly, hence using the word 'debit'. With a credit card, you have a 'line of credit' that can be used for purchases up to a pre-approved limit.
When applying for and using credit cards, there are several things you should look at:
getting the right deal
interest rates
credit limits
usage perks
credit utilisation ratios
credit scores
There are also ways to compare between different credit card providers. I will touch on all these in the coming blog posts in the coming days!
**DISCLAIMER**
All content provided on this platform is intended for informational, educational and entertainment purposes only, and should not be construed as strict financial advice. The information presented does not constitute a recommendation to buy or sell any specific security, investment product, or service. Investing involves risk, including the potential loss of principal (money). It is important to conduct thorough research or consult with a qualified financial advisor before making any investment decisions.
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