FINANCE

Can you live on your credit card?

Tuesday 24 March 2015, 10:00AM
By Harold French
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While credit cards may be viewed with some nervousness by a few, they are nothing more than a method of making payment – or are they?

Where credit cards differ is that they provide an allowance up front, which is only required to be settled (typically) 45 to 55 days after a purchase is made. However, the limit isn’t a target, and the allowance isn’t ‘free money’ but has to come out of your paycheque. The card is merely a more convenient, safe and flexible payment method than carrying cash.

With these simple principles in mind, living on your credit card and enjoying convenience and visibility of spending is a distinct possibility, particularly with the practical ubiquity of card friendly point of sale systems. By living on your credit card, you can also take advantage of special features such as no-hassle access to interest free finance.

Let’s first consider the pros and cons to using your card as the primary means of payment.

Pros:

  • Using a credit card virtually eliminates the need for cash. Carrying cash is not only inherently more risky, but cash in the bank is always worth more than cash in the hand as it earns interest or offsets debt. Drawing cash also cost money – and it can be tricky to anticipate just how much cash you may need from day to day.
  • Credit cards facilitate better budgeting. Using a card means every transaction is recorded on your statement, allowing for later analysis of spending habits and providing clear records of where the money went.
  • Interest free purchases. Used carefully within specified terms and conditions, a credit card can provide instant access to interest free finance for those larger purchases. For example, GE Money’s Gem Visa allows 6 months to pay, interest free, on any item over $250 – and long term interest free deals.
  • Online shopping is easier. You can shop online without one, but a credit card is more flexible and easier to use than other options.
  • You can earn rewards. Some credit cards provide incentives to swipe, with rewards accumulating on the basis of spending.
  • Insurance. Some credit cards provide automatic travel insurance when used to book overseas trips. Others provide simple and inexpensive ‘Shopper’s Protection’ insurance.
  • Portability. Credit cards are universally accepted, even in other countries. That means you don’t need foreign currency – you can just pay by card.

 

Cons:

  • Spending doesn’t hurt. Unlike seeing a wad of cash slowly (or quickly) disappearing, spending on a card can appear consequence free – and you could overdo it.
  • Interest can be charged. Smart credit card users always settle their credit card bill in full every month. This means they never pay interest.
  • Extra cost. Some vendors charge a fee (typically 1 to 3%) to process a credit card transaction.
  • Signing up for multiple cards can cause cascading debt. It is easy to apply for and get credit cards from several different providers. This is not recommended as the debt to which you have access could easily exceed your ability to repay it.


So, why would you want to live off your credit card and eschew any other means of payment (particularly debit card)? We asked someone who does just that. James* explains:

“I looked at the interest free programme offered by Gem Visa, and recognised that even if I had cash, I could gain an advantage by buying those items on my card. That leaves more cash in hand without any penalty.”

That’s not all; James says the flexibility and portability of the credit card is a massive boost to convenience.

“Paying just about anything with the card is possible and you get to review and analyse every bit of spending, either online or on a monthly basis using your bank statement.”

He has simple rules which are always followed (and it doesn’t just mean swiping his card for every purchase).

“I know that provided I pay the full amount due every month, I pay no interest on my spending. Always, always make sure you have enough money to pay, or the interest charges will trip you up – but if I pay no interest, and get the bigger ticket items anyway, then I am winning,” he says.

“Having a card with access to interest free credit does mean you need to resist the temptation to buy expensive things that you may not be able to afford.”

A final word: “If your cashflow is erratic or not strong enough, beware of relying on a credit card as the interest will catch up with you. And remember, you also pay [an annual fee] to have the card.”

*Not real name.