Despite what you may think, rich people use credit cards. In fact they love them! Credit cards have gotten a really bad reputation in the media. Often the finance gurus say to cut them up, never to use them, or don’t even think about having them all. That’s probably because a lot of people don’t know how to use them.
With a lot of low incomers or middle class people, they initially start getting a credit card for a rainy day or that one of purchase. After a while it ends up becoming very much a part of their day to day spending habits until the next minute they’re $20,000 in debt with the 20% interest rate.
This highlights the problem, and no it isn’t the credit card; the problem is with the individual. And the thing that separates the rich people from others on how to use credit cards is that they go in there with a strategy. They have a strategy on how they are going to beat the bank and use the leverage of having a credit card.
Look beyond the credit
You need to be looking for more than the credit. So, I’m talking about how some premium credit cards come with travel insurance, international travel insurance or even a gift card. The travel insurance could have an immediate value of $300-$400 if you are going to travel in the immediate future.
Not to mentioned the 0% foreign transaction fee! So, paying a $200 annual fee and getting $400 worth of travel insurance particularly when you are going to use it pays for the benefit itself.
Banks are also pretty big on rewards programs. I personally use Qantas Rewards. You can use your points to get free or heavily discounted holidays or even an upgrade to first class!
There is a general rule of thumb that reward points actually have 1% real money value. So if you have 100,000 Qantas points that would equate to around $1,000 in travel value.
Now when you look at a credit card offering 60,000 reward points with an annual fee of $200, you will be receiving around $600 in value for $200. Assuming that you only pay for one year. More on this below.
Having a system
To effectively use credit cards like the wealthy you have to have a system. A common system or strategy is to use your credit card for ALL your expenses. Daily spending, groceries’, going out, entertainment or just pretty much anything that isn’t a cash withdrawal.
And then pay the balance in full every month, or whenever you get paid. So, they never pay any interest. EVER.
The standard today is 55 days interest free. There’s no reason for anyone, anyone at all to be paying interest on their credit card. You should be able to have a structured budget and be able to pay it off within that 55 days as an absolute minimum.
Ideally, would pay more frequently depending on the structure the credit card and what points they give you but fortnightly if not monthly is what you should be aiming for.
Avoid Annual Fees
This is a bit Cheeky but hey! That’s the business name so we need to live up to it right? So what you can do is actually get the bank to waive their annual fee. I’ve done this myself when I was switching credit cards to a bank that offers better rewards. When they asked why I was cancelling I said the annual fee was too high.
As I was clearly talking to a decent sales person they rebutted this objection and said that they would waive the annual fee! How cool is that? Now this may seem unreasonably generous for a bank but that’s because they know that statistically they make money from credit cards.
The $200 annual fee is nothing compared to the interest that people pay banks back when using credit cards. So for this reason they forgo the $200 to make more money over the long term.
Watch your credit rating
One warning I will issue is that if you change credit cards a lot this can impact on your credit rating, The banks won’t tell you this when they offer 0% interest for balance transfers but it can have an enormous impact on your future ability to source credit. Check out Creditsavvy.com.au to view your current credit score.
- Never EVER pay interest
- Have a strategy
- Look for additional benefits
- Pay off in full EVERY month