You have probably read some horror stories about people chalking up huge credit card debts, whilst spending beyond their means, eventually ending up in financial ruin. Well the good news is that, contrary to popular belief, credit cards are actually one of my favourite tools in my pursuit of financial freedom.
With a little bit of financial prudence and discipline, credit cards actually contribute to making your financial objectives. Now, i heard that skeptical voice in your head saying, "No way ! How would spending help you save ? That's oxymoronic". Let me explain why.
1. Cashback
All of the credit cards i use have some form of cash back rewards component. The cash back helps me get some form of rebates from my spending - example: Furniture, Electrical Appliances, Dining and Holidays. Just think of it as an automatic 0.5% to 3% discount - that's how good it is.
I am not advocating to spend frivolously just to get cash back. However, every once in a while, there we will need to buy a big ticket item; Why not utilize a cash back card for it ?. Aside from cashback rewards, some credit cards have great features like 1-for-1 dining and grocery rebates.
I use my Standard Chartered Manhattan card for spending above $3000, as this gives me a 3% rebate.
I typically use my UOB One card for all online purchases and dining, as this gives me a consistent rebate based on my spending over 3 consecutive months.
2. Payment
One of the biggest pitfalls of credit is to misuse it. Yet, controlling your credit, allows you to keep that extra cash for a month or two - perhaps even using it to generate some interest in your savings account.
The fundamental concept that i have learnt is never to spend more than you earn. This means to pay your credit card debts in a timely manner and to spend within your means. Whilst it may be tempting, NEVER allow it to roll! Last thing on earth you would want is to be living proof of a horror story (ending in financial ruin).
3. Tracking
I have personally spoken to colleagues and friends who have no idea why they are unable to save. They often lament that their salary often goes "missing" by the end of the month. Well, money never actually goes "missing". But if you don't track your spending, it is likely that much of it is going into what i would call "unnecessary expense".
Spending on my credit card allows me to track my expenses. This ensures that my money never goes missing. I would use the online statements of my credit card to track my expenses in an Excel sheet. This process tells me what i have been spending on, allowing me to have better control and to make better financial decisions.
