Financial freedom doesn’t mean you are free from debt. It means freedom from the vicious cycle of poverty. Poverty in the modern sense goes beyond the basic needs of living. It is the moment when you need something but cannot afford it. For example, it is your wife’s birthday and you want to make her happy with some tiny jewellery. But you do not have the means to do so. This is where credit cards give you the leverage.

Today, I am going to use my credit card for a good purpose. I am going to enrol my daughter in her accounting course. Academic instituitions have a built in interest when they give an instalment plan. Credit cards have a zero interest instllment payment for such purpose. But before I swipe my card to fulfill my dauther’ dream this is what I will do to mangage my credit card commitment. You can ask Mr Credit Card or you can just continue reading my understanding.To me debt is a commitment that cannot be paid. It is synonymous to bad debts. I take this credit card instalment plan as a form of savings. Expend as you save. Savings are the money you keep in the bank for future use.

Leverage on the things that you cannot afford -  don’t buy essentials

Credit cards are wonderful non life to leverage us to enrichment. Not all the things are affordable as our means are limited. Even a billionaire cannot afford all the things in life. As our income is limited we turn to credit cards to leverage our needs. The truth about credit cards is like eating an elephant by slicing it into pieces. Go for the interest free instalment plan.

Banks propose and promote credit cards to be used for essentials. This is false justification. I will tell you why.

If you purcahse weekly groceries at $50 using credit cards. In 4 weeks you owe bank $200. The rebate or discount you get using credit card may be 10% or $20. this is OK if you pay up the $200 promptly. But if cannot manage the payment you will end up paying 40% more. In other words, rather than saving $20 you pay $260 for grocery expenses in that particular month. Settle essential only with cash.

Use It To Purchase Investment Like Stocks And Shares

If you possess a credit card use it to buy shares. For instance if the offer price is $3.50 per share 1 lot or 1000 shares will cost $3,500. If you can borrow up to 70% of the value of the shares it means you have to fork out only $1,050 cash upfront. With your credit card you can borrow up to 100% of the share value.

Assuming your bank cahrges around $400(inclusive of processing fee) monthly intalment for 12 months, you will be on save track provided you pay on time to avoid interest of over 20 or 40%. And then you can hop that your share price goes up.

Pay Promptly – Make Payment During the First 20 Days

This is the trick banks play with credit card holders. Upon purchase of items using credit cards bank send payment advice to holders after 20 days. Upon receipt of this advice credit card users have another 20 days grace period to pay up. Pay immediately upon receipt of this advice and do not dwell on the second 20 days.

The second option will be to purchase 7 days before your salary credit date. For example, if your slary credit is on the 28 of every month, purchase using credit cards on the 21ST of that month. In this way your 40 days grace period will have to pass two salary credit dates. You will have the cash not to miss the chances to pay promptly.

Less Payment From Monthly Budget

Leveraging does not make sense if you do not make the credit card payment as expenses from your budget. If you are incurring $200 per month for the next 24 months, you need to put a budget for that period showing $200 as expenses and deductions from your income. By this you will have an actual disposable income. Disposable income is your real spending power for the entire month.

Do Not Overspend – 6.5%

By over spending you are actually putting much weight on your financial stability. If you intend to save 10% of your gross income, then use 6.5% of your salary to pay up monthly credit card instalment. Do not go beyond this 6.5% of your income to service credit cards charges.

Avoid Yearly Subscription Charges

When you use your credit cards to pay on monthly instalment, try to avoid yearly subscription. If you have 3 year free subscription card, use only 24 months interest free credit. At the end of the 24 month you can call up your bank and request for another 2 years waiver. Otherwise you can cancel the cards and re-apply to get free subscription facility.

Do not get tied up to the full 36 months, the bank has the upper hand to charge you the subscription fees.:)

Reimbursable Essentials

Entertainment charges for clients at a dinner or a club, which are reimbursable from your company, can be expended using credit cards. Transportation claims, petrol charges and other claimable expenses can be charged in your cards.

Credit cards are seen as man made devils which brings the holder to financial hell. This is true to a great extent. But if you can manage the purpose of purchase and payment, I think credit cards are actually angels in disguise.:)

What do you think?