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Sunday, September 16, 2012

Things you shouldn't do with a credit card.

Most people have a credit card.  Some people can put thousands of dollars each month on their credit cards and pay no interest.  Other people can be particularly frugal yet end up paying massive amounts of interest.  Is it luck, good management, or something else? Perhaps this will clear some things up.

Things you shouldn't do with a credit card.

1. Buy an investment scheme.

I'm speaking from personal experience here.  My interest rate is over 20%.  Did I honestly think this whiz-bang computer program was going to make me money over and above that rate and pay down my debt as well?  At best, the novice investor should be happy with a 10% return.  The credit card is not the vehicle for purchasing investments.  Use your savings for this.

2.  Set up a business

You want to start a business?  Great.  Businesses are a great way of making money.  But credit cards have massive interest attached and are not a good way to finance your endeavour.  Instead, you should go to a bank and negotiate a loan with a much lower rate.  If they won't lend you the money, that's a good indication that you may need to refine your business plan.  Making emotional decisions at this point and using the card anyway could lead to problems.

3. Pay up-front course fees.

Getting an education is always a good idea.  The more you know, the more options you have.  But have a plan on how you are going to use your new skills to make that money back and more besides.  Getting a Student Loan may be better for you than using the card because you can negotiate a better rate.  Alternatively, look into payment plans with your education institution.  You may find that the weekly rate they offer, whilst higher than the up-front cost, is lower than the option of paying your course fees plus interest on your credit card.

4. Buy a boat

The boat in this case represents any big expense that is just for pleasure.  This is a bad habit to get into.  If you can't legitimately save up for your hobbies and toys, it's not going to get any easier by putting them on the card.  This is just a symptom of a requirement for intant gratification.  Buy now-pay later habits lead to a house full of new stuff which quickly becomes old, worn-out stuff and massive credit card debt that you can't pay.

So what is the credit card for then?

To learn the answer to this have a look at my blog post "How to use a credit card properly"


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