Sunday, January 11, 2009

Use a Credit Card to simplify your life

A credit card is a good tool to have in your financial tool box. But, like any tool, you have to use it properly. Just as you are not supposed to use a screwdriver as a chisel, you should not use a credit card to buy things you can not afford. (Guess how the Banks got into their financial crisis!)

When you looking for a Credit Card to carry, make sure it has the features that work best for you financially. It should have no annual fee, it should have a payment grace period that is the same or longer than that of other credit cards. And it should have a flexible Rewards Program that allows you to earn points, which you can trade for air miles and merchandise you consider useful. Chase, Amex Blue, and Citibank all have rewards programs.

Once you have the right card, you should use it to pay as many household bills as you can. The electric, gas, phone, Internet, mortgage (or rent), food, etc. all have to be paid every month, so you might as well earn points while you pay.

After that, use your credit card wisely to pay for vacations and any other things you can afford to pay for in full when you receive your monthly statement. By paying off the entire balance each month you will not be subject to paying additional money in the form of interest (typically 10-12%). Otherwise, that item you bought on sale will end up costing you more than if you bought it when it was not on sale.

You will also earn interest on the extra money that stays in the bank during the credit card’s grace period (the time between when you buy something and when you pay for it – usually 20-25 days). The interest you earn during this “Float” time will compound over the years, putting you in a better financial position.

One of the best ways to earn good “interest” is by keeping your money in a Money Market Fund. The payout is called a “Dividend” and accumulates just as interest would. The rates paid by money market funds closely follow the interest rate in the market. As interest rates in the market go up, so do money market fund rates. Not all money market funds pay the same rates, so choose carefully (Vanguard Prime Money Market Fund is one of the good ones).

Banks, on the other hand, tend not to follow the market so closely, and pay you less interest. So keep your “Float Earnings” in a place where they will do you the most good.

Many money market funds have a minimum amount that you can write a check for. One such fund has a $250 minimum – but your monthly spending will easily be more than that. An additional benefit of using your credit card is that you will write one check to pay many bills – what a great time savings !

Remember to Never Carry a Balance ! If you miss a payment once every other year, call your credit card company, they will be happy to remove the late fee because you are such a good customer !