Wednesday, October 26, 2011

How to save more by using Credit Cards

I know how the heading sounds. Like a typical debit/credit card issuing bank. But trust me, this isn't what it seems. I am talking about exploiting your bank/credit card to the limit, the same way the Banks squeeze you off your money. Tit for tat.
The idea of a credit card is that you dont have to pay for the purchase immediately, but after a 'credit' period which is usually 45-50 days at the maximum and 18/20 days at the minimum. This means that you have a minimum of 18/20 days to pay your credit card bill after the purchase (if this purchase happens to be on the billing date of the credit card). And if you make the purchase the very next day of your billing date, your credit period is maximum.
If we assume that you dont really time your purchase and it can occur on any given day of the month, your credit period would vary between 18 to 50 days. The average credit period is (18+50)/2 = 34 days.
For safety measures, I always recommend you to pay your credit card bill 2 days in advance of your last payment date (in case internet is not working, bank holidays, computer maintenance at the bank, etc.; Be careful not to delay the credit card payment even by one day as this will make you pay huge late payment charges and a high interest rate of 24-36% per annum is used for paying the pending amount and the whole idea of bank's trying to exploit you will occur.)
So your average credit period is 34-2= 32 days, approximately a month of free credit.
If you spend around 10,000 per month on your credit card bill (groceries, provisions, eating out, air tickets,etc) instead of your debit card or other cash methods, you save around (10,000* 4% p.a/ 12) = Rs.33.33 per month or Rs.400 annually. It may not seem much initially, but that 4% per annum is what you are/were getting on your savings bank account without paying for the purchases immediately using a debit card/cash/netbanking. You would obviously save more if you had more expenditure on your credit card or time your flexible purchase to the day(s) immediately after your billing date.
With RBI deregulating savings bank accounts, and Yes Bank already upping the interest rate on the savings accounts by 2%, it is in the near future that other banks will also increase the rates. In this scenario, your savings from usage of credit cards is going to only increase. 
Usually this savings is far more than the reward points one can earn from the credit card company. The reward points are usually some 1.33% for some premium card and the rewards redemption is so calculated that for every 3 or more reward points, you get Rs.1 worth of stuff. So the maximum benefit you can expect is  1.33%/3 or around 0.44%. This is next to nothing compared to the nearly ten times more 4% per annum (or greater) you can get on all the purchases made with the cash lying in the savings bank account and paying the credit card bill just before the last date.
P.S: I have been using this strategy for over 5 years and have faced no problems at all. Financial discipline is necessary to get more out of your money.
Paraphrasing the line in the book "Rich Dad, Poor Dad": Don't work for money, Make the money work for you.

1 comment:

  1. I have activated my auto deduct facility that automatically pays my credit card bill (Total amount due) on the due date. That way, I never miss paying the bill. Plus, I enjoy free credit and reward points. What else, when I fill up my car, I also get waiver. Typically, on a purchase of Rs 2500 petrol, I get Rs. 70 back. That is 1 ltr. petrol free...
    Ajit, you are right. It is only the discipline that make or break things.