A number of people don't realize the value of using credit cards the right way. If you use your credit with certain rules, it is a friend otherwise it can keep haunting you for years. When I learnt about credit cards and the idea of cash back, I made some rough calculations in my head and felt I was losing so much by not having one. Earlier in life when I didn't had income, I tried but I got rejected by credit card companies every time. You won't believe but even my secure credit card application which you apply for by providing a deposit upfront also was rejected.Imagine the fun!
But I never stopped trying because it was a simple math example that got me motivated. Lets say I was spending $300 in groceries a month which is fairly standard, you end up paying roughly $3600 for the whole year. Now imagine, if I paid just using a debit card or cash then I would have hardly gotten anything in return. On signing up with one of the credit cards, I got 3% cash back for my groceries and hence in an year I was able to save $108. Over the next $25 years lets just assume my monthly spend on groceries doesn't even change by a dollar, I would still end up making an approximate of $4372 if I would have just invested my grocery change in the stock market with a basic 7% return.
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| Source: Fidelity.ca growth calculator |
Its amazing how the power of compounding works, and by just replacing one plastic card with another, you end up putting $4K back in your pocket. Since then I have just started to think smart and now have a credit card for each category of spend thereby significantly growing my savings rather than paying using cash or debit. Some of my credit cards even have a larger cash back percentage like 5%-6% so that's more money right there for you.
Fortunately, I have a good credit score and I had always learnt to pay my credit card bills in time so as to not rack up fees and interest that the card companies could charge. I was always a little afraid to accumulate any balance on my credit card and to keep my anxiety in check even paid for the transactions as soon I made one so as to maintain a $0 balance.
I had heard about the term 0% APR (Annual Percentage Rate) on credit cards so many times but just because of the anxiety of having to think about anything other than paying my card in full always just made me uncomfortable. But with a leap of faith, one fine day I started diving into this to learn more. I read on the topic, talked to a number of customer representatives from the card companies and tried to understand how this really worked.
Reading and talking to multiple people I quickly learnt that for the promotional period of 0% APR, you can maintain a balance on your credit card if you paid the minimum monthly balance off. The minimum balance on a credit card is a fairly small amount when you consider your full monthly credit card bill. Some companies could even cap the minimum payment to something like $25 or $35 depending if you get that deal.
Now given the savings rate were so rock bottom and now that I was getting free money which I did not had to pay back at least till an year, I was excited. Hence rather than lets say paying roughly $6000 worth of credit card bills in an year, I could just use this money and invest it to earn a higher interest rate. Then use the money I earned from investing to pay off the credit card bill at the end of the year.
The downside of this is once you accumulate debt, because of the bills you don't pay, it ends up impacting your credit score. In my situation, it was less of a concern as my credit was very high and hence pushing my accumulation of debt to 10% of total credit was not too bad. I am still executing on this strategy in the year 2022 as you could every year qualify for some promotional offer each year by these credit card companies (you should ask), just be careful to pay the minimum balance.
Moral of the story is that money in your hand right now is worth way more than just giving it away since then you cannot make your money work for you. Hence I am taking a back seat and letting my investments do all the hard work for me.
(Disclosure: Please review the Disclaimer section prior to any investments.)