I wrote in the previous article that credit card is a mass financial destruction, for many people. If your financial blueprint is bad, i.e you just have those buying impulsive order syndrome, or just don’t really care about your cashflow or money, best is you avoid using credit card.

However, in this article, I shall showcase to you why you want to transact almost every of your purchases in credit card. This work for you, provided you always pay full your bill on time.

Let’s examine how credit card companies make money. Bank partners with credit card companies such as Visa, Masters, and Amex, and together they issue you the card. They do their financial due diligence to ensure that only the right person can apply for the card. They make money from 2 main source; merchants and consumers.

From the merchants, they charge a percentage fee when their consumers uses the card to purchase their products. Why won’t merchants do that? First of all, credit card companies guarantee the payment of the purchase to the merchant. If you receive payment in hard cash from consumer, you may still have to worry about the risk of money loss due to theft etc. Of course, as I shared previously before, when consumer use credit card, somehow their budget increases as they use their future money to spend and certain cards offer Interest Free Installment Program up to 60 months! In turn, the sales increase for the merchants. Hence for a small fee for using the card, merchants get higher sales and in turn better profits for the companies.

Another source is from consumer, in terms of credit card debts repayment and annual fees payment. When the users decide to only pay the minimum amount due, or when they pay it late, the bank/ credit card companies charges up to 30% p.a for such credit card debts! If you can’t pay, they seize your other assets and bankrupt you until you pay it back. Next is the annual fees which you may need to pay for using their credit card facilities. Many people are mindless about their bills and only pay the full sum without checking out the itemized expenses. As a result, they didn’t realize that you actually can call the bank to waive off such fees. Of course some card companies entice you to pay, by offering you certain perks.

If you are someone who is prudent with your spending, and has no such impulsive order syndrome, credit card is a fantastic tool for you and me.

In this competitive market, we are spoilt with choices for credit card. Hence this become a consumer market where the credit card companies dangle lots of carrots for us to choose the best credit cards. While I don’t have any particular preference for cards, generally you want to stick to 1-2 cards which has a good rewards system. Such system can in exchange for miles or cash back. For simplicity sake, let’s use a cash back card as an example.

If you charge all your purchases to this one cash back card, and assuming your total expenses is about $30,000 a year, a conservative average 1% cash back on your purchases will give you a $300 cash in return. You can then use that money for better purposes. However, do note that in reality, such cash back card has exclusion clauses where they don’t give cash back for certain transactions such as tax payment, insurance premium payment etc. There also also a cap to the amount of cash back you can receive. However, my point is simple; you get benefits back in return from your purchases, compared to nothing if you use cash or debit card. Hence let’s not debate on which card is better, miles or cash back etc.

Another powerful reason why you want to use credit card for all your purchases if possible, is that when you do that, you only pay the bills 30-45 days later. Interest free. Your savings, which was meant to pay the bills, get to earn an extra interest for you in the next 30 days at least. If you were to use cash or debit card, money is immediately deducted from your bank balance, hence you lose out on the interest you suppose to earn.

It might seem to you as a “hack” for small money. Too small for many to ignore. However if you apply it over the long term, your reap rewards will be very enticing.

Consider that your annual spending is $30,000 a year, and because of credit card transactions, you delay your bill payment by 30 days while your saving in the bank account earn the extra interest in that 30 days. $30,000 in a bank saving account of say 1% p.a, in 30 days, earns you extra $25. Not a lot uh? I agree with you and that’s why many people ignore this hack. However remember I told you that bank never wants to give you high interest rate? Let’s assume you put it into treasury bills, or other place for storage, and the interest is 4% p.a, we are talking about a savings of $100 now. The very rich spend more than $30,000 a year, if you add that extra zero to that, they save over $1,000 a year. Not yet included the compound interest which you are going to earn for your savings…

While my scenarios and the savings earned is not enticing enough for you, my point to you the reader is this; learn to extract benefits from every transactions you make, and make your savings work harder for you through compound interest. If I were you, I’ll not use my savings to pay the bills. I’ll only use my next month salary to pay bills, and let my savings to compound at a reasonable interest rate on a daily basis and let it work harder for me. Only when the purchases are huge, I’ll partially withdraw from my savings to pay off the bills. Doing so ensures that your hard earned money and savings will make hard and hence snowball over time.