‘Academic’ Intelligence: The Use and Abuse of Credit Cards, Part One

I would like to commence by noting that I had decided to devote several articles on a topic which had haunted many for ages and which had never, arguably, been ‘academic’ as such.

Prior to being involved in work in the retail banking sector, however, the said topic was quite alien to me and, as I got to learn ‘the tricks of the trade’, I got more and more infuriated that no- one had taught me those seemingly simple things before I embarked on the somewhat perilous journey that is life.

In the discussion to follow, I shan’t, of course, refer to any specific credit cards as I am not regulated by the Financial Services Authority; neither will I attempt to recommend any types or brands of credit cards.

Rather, I will simply opt to present the reader with an overview of the various ways in which a credit card should, should not and must not be utilised; something that has no- one has ever bothered to tell me before.

Today, I shall focus on:

The X Months ‘Interest Free’ Credit Card

Most credit card providers offer a myriad of credit cards with 0% on interest in PURCHASES for the first X months.

Put simply, if you were to get a credit card with an eighteen- month interest free period on purchases, the amount of the credit card would not accrue any interest for eighteen months.

An example would be quite helpful:

     è  Dizzy Credit Card, 18 months 0% APR on purchases, 20% APR thereafter

If you were to buy a TV set worth £ 1000 on the above credit card, you could spread out the cost over eighteen months as, up to the eighteenth month, the amount on the credit card would remain £ 1000.

If, however, you were to go over the eighteen month period, an ANNUAL interest of 20% would apply to the outstanding amount (roughly 1.67% monthly interest).

It is of utmost importance to always remember two things:

•         The 0% interest is only applied on PURCHASES and NOT on withdrawals from cash machines. NEVER use a credit card to withdraw cash from an ATM; the charges that you will incur are monstrous- sometimes up to 10% of what you withdraw. Also, withdrawing £ 100 from an ATM is NOT considered a purchase and is not, thus, interest- free and needs to be repaid in a month for if it is not, it will begin to accrue a monthly interest rate (in our case, 1,67% per month).

•   The interest free period is, in our example, eighteen months; when this period lapses, the ‘promotional’ 0% on purchases no longer applies. Thus, any purchases you make after the eighteenth month will have to be repaid back in a month’s time or a monthly interest rate (in our case, 1, 67% per month)  will be applied to them.

Such credit cards are often used to build up your credit rating and to purchase items, the cost of which you want to spread out over a certain period of time.

Also, when selecting such a credit card, look out for providers who will also offer you other benefits along with the 0% APR such as, for instance, air miles, points or cash back on purchases.

•      Air Miles

Some credit card providers offer cards which award you a certain amount of ‘air miles’ for every pound (or ten pounds) spent on your credit card. The air miles can then be used in lieu of money to purchase flights to certain destinations.

• Points

Again, some providers award you a certain amount of points for every pound you spend on your card. The points can then be exchanged for various discounts or gift cards in high street shops, supermarkets, etc.

•  Cash- back

Another good feat of a 0% APR credit card might be a 1% cash- back purchases. Many people say that 1% is not a substantial amount but if you do a rough calculation, you will see that for every £ 1000 you spend on the credit card, you get £ 10 back and without lifting your finger.

The easiest way of using a 0% APR credit card is to buy a single item, put it on the card, spread out the payments, find out when your 0% APR period ends (in our case, the exact date on which the eighteen- month interest free period ends) and set up a monthly standing order. 

For instance:

If you put a TV set worth £ 1000 and put it on the eighteen month interest- free credit card, simply set up a monthly standing order (NOT a direct debit) for £ 55.56 from you current account directly to your credit card, the last payment being on the eighteenth month.

In that way, not only will you have made paying for the laptop easier but you might have accumulated some air miles, points or got a £ 10 cash- back.

In the light of the above, I would like to note that I am, in no shape or form, encouraging readers to live on credit all their lives.

The above article is aimed at demonstrating that using a credit card correctly can sometimes be immensely beneficial to a person’s financial situation by helping him cope with his current financial obligations.

Further, if a credit card is managed properly, it often reward the user with certain perks (as noted above) which can often be viewed as long- term savings.

Being in control of his finances and debt is of utmost importance to a person’s well- being as it immensely reduces his stress levels which, consequently, substantially increases his productivity and standard of life.