For most people a credit card is a tool for financing what they want to buy. Too many people see a credit card as tool for spending money and getting the things they want. They take their credit card out shopping and buy stuff with it. These purchases add up to a significant debt, one that simply cannot be paid off by the end of the month.
Because of this they let their credit card balance carry over to the next month, where it accrues a very high interest rate. This type of spending represents the complete opposite of what you should be using a credit card for. A credit card should not be seen as a method of finance, but instead it should be seen a specific style of payment. By understanding this simple fact you are well on your way to being frugal with your credit card. Frugal use of a credit card can actually save you money rather than cost you money!
Pay Off Your Balance
In order to successfully make using a credit card a tool for savings, you absolutely must use the card properly. This means using it as tool for payment and not a tool for finance. The number one rule to being frugal with your credit card is to pay off your monthly balance. This means paying off your balance each month, on time, without exception. As soon as your card carries over a balance from month to month- you are screwed. You will lose any potential savings in interest. So pay off your monthly balance.
How do you set yourself up to be able to pay off your balance on time each month? By using your card for a few specific purchases only and by never purchasing something that you will not be able to pay for. Try to think of your card as a payment option. Say you want to buy something for $200.
If you have $200 or are 100% sure you will have $200 by the end of the month, then you can purchase it on your card and pay off the balance at the end of the month. If you want to buy something for $200 but you don’t have that amount or by the end of the month you will only have $150, then do not make the purchase. The process can be made simpler by having a set purchase to make and then pay off each month. A good example of this is your car insurance payment. Place that bill on your card each month because you already have a plan to pay it off.
Don’t just go shopping with your credit card. The temptation to buy things that you do not have the money for is too high and it will ruin your plans for frugality. Once you have created a habit where you always pay off your monthly credit card balance, you will be set up to use your credit card as a money saving tool.
Using A Credit Card As A Money Saving Tool
It is possible to use your credit card as a money saving payment option tool. One more time- this can only be performed if you always pay off your monthly balance. Now, assuming that you do always pay your monthly balance off, you can take advantage of many promotional rates and rewards that credit card companies offer. First you have to choose a card that will help you
save money according to your lifestyle. When choosing a credit card to use as a money saving tool, think of what you want from it. Do you want reward points or airline miles, or if you want cash back options? Don’t worry about the card’s interest rate. Even if it is high you will be paying your card’s balance off each month anyway.
The next step is to find the best sign up bonuses offered by credit card companies. In an effort to grab the attention of new customers, many credit card companies are offering outstanding bonus offers just for signing up. With this type of card you will get a huge amount of airline miles or reward points just for signing up. So, right off the bat you are saving money. As airline miles can depreciate over time you may want to choose a great cash back rewards program. Cash is always useful! If you are getting a rewards program card, take the time to figure just how much you will save in a year by staying with the program. If it is viable then go for it.
You may also want to choose a card that offers you flexibility with your rewards and bonuses. Sometimes card companies offer great rewards but don’t let you use them when and how you want to. Pick one thing that you want to get from your credit card and stick to it. So if you want airline miles, pick a card that offers long range and flexible airline rewards. If you want cash back, then look for a card that offers a cash back percent of over 1.5%. Anything below that will not be worth it. Take the time to figure out how much you will benefit by getting rewards, whether you will save more with airline miles on a trip or whether you can get cash back.
If you are smart about your credit card use then you can truly make credit card companies work for you. You can save money and earn rewards by taking advantage of credit card companies’ bonus offers and promotional deals. All of this requires that you are disciplined with your card. If you are not yet disciplined enough to make sure that you can always pay off your monthly balance, then you need to work on how you can be more frugal with your credit cards. Remember, a credit card is a payment option tool, not a way to finance purchases that you cannot afford to make.
This article was written by personal finance writer Timothy Ng from Sydney, Australia. He is genuinely passionate about helping people compare credit cards and helping them through researching to find the best credit card.