How Credit Can Be Your Friend

Credit Card Tips

First Published Date: April 18, 2009

There is no doubt that an over-reliance on credit is a bad thing. One has only to look at the mess that the world is currently in to see that the banks’ readiness to lend to people who really should not have been borrowing was unwise. Equally, some of those people doing the borrowing must have been aware that what they were doing carried a huge risk. And yet, if handled correctly, credit can be a way of doing things to your advantage in the long term.

To make credit work for you, you need to keep in mind that risk management is a vital part of the process. As far as possible you need to keep risk out of the equation altogether. You need to keep your interests, your long-term security and needs in the forefront of your mind. Although things like high-value purchases of consumer items may seem hugely tempting, they are to be ignored if there is any chance that they will infringe on your financial security.

So in reading this, you may well be questioning how credit can be your friend at all. The truth of the matter is that credit allows you to spread life’s costs. This is possible without a great deal of risk, because banks will be happy to give good lending deals to people who show the ability to manage credit. And you can do this by living on credit. Don’t worry – this is not as risky as it sounds. It simply involves using the rules to your advantage, and requires discipline (so if you are prone to getting distracted by bargains, do not proceed unless you are sure you can restrain yourself).

The first step is to open a savings account. The best one to go for is one that has either got no limit as to how much you can put in monthly or over a year, or a limit that matches or exceeds your salary. Of the options this leaves you, pick the one with the highest rate of interest. This account is where you want to put your wages each month.

Now, take out a credit card. The experiment ends here if a bank will not give you a credit card due to past borrowing nightmares – but that is probably a good thing. This credit card will be what you use to do your essential shopping. Groceries? On the card. Fuel? On the card. Bills? On the card, if possible. Is this reckless spending? No, it is not because you are going to pay the balance off, in full, before it gets the chance to accrue interest. Most cards accrue interest monthly, but it is not going to be an issue if you monitor your card balance and withdraw from the savings account to pay it off every time a balance appears.

If you do this with a modicum of discipline you will find that there is still money in the savings account at the end of the month, and it is accruing interest. Meanwhile, your credit score is increasing with every full balance payment you make to the card. Not only are you financially solvent, but you are making savings, and have the borrowing power to get the best mortgage possible should you have your eye on a house, or a loan to buy a car. And the savings? They come in very handy if you want to bring down the monthly payments on a loan.

To streamline and minimize blog maintenance, I will be discontinuing maintaining the Canadapersonalfinancewebsite.com website (however, I will still hold the domain). I will gradually move all articles from this site to A Dawn Journal. This article originally published on the above website on Apr 18, 2009.