A credit card is a pretty useful tool when incorporated with wise financial management for the everyday consumer. Apart from the ability to derive rewards and manage cash flow better, it also serves as a way to build a good credit profile which benefits the user through better terms when seeking financing. Despite the perceived benefits, a lot of people scorn credit cards under the general negative stigma of debt being bad and a credit card being the financial tool which will sink them. However, today’s article will dispel these concerns and show the benefits of using a credit card with sound financial planning.

A credit card is an instrument issued by a bank or financial services company that allows you to borrow funds to pay for goods and services at merchants which accept them. While credit cards tend to have the highest levels of effective annual interest rates (EAIR) and annual percentage rates, these are only applied against your statement balance when you don’t pay it off in full by the due or payment date. Otherwise, the only fees you might pay for a credit card is the annual fee, which might be waived if you spend a certain amount for a period with that card.

There are some key terms which need to be discussed when talking about a credit card. These include:

*Billing cycle – This is the period when transactions done with your card is recorded. It tends to be 30 days between each cycle and might be longer if the closing date on that billing cycle falls on a weekend.

*Credit limit – This is the amount of funds extended for you to use on your credit card. If you go above the card limit, you will likely be in overdraft and might incur overdraft fees. If there’s an overdraft limit, then any transaction up to that point would be processed and approved. Otherwise, the transaction would be declined.

*Due/payment date – This is when you must pay off the statement balance on your card. The payment date tends to be six days before the end of your billing cycle. If you don’t pay anything by this date, you would likely incur a late fee.

*Minimum payment – This is the minimum amount as a percentage of the statement balance or a fixed amount which must be paid in order to keep the card in good standing and avoid additional penalties.

*Monthly statement – This is a document generated at the end of the billing cycle which shows all the transactions conducted in that period. It will list all transactions, where services were paid for, the times the cardholder repaid the amount owed, and possible creditor life insurance payments on that card. It would also show how much credit was available at the end of the billing cycle, the payment date, and the billing cycle for that period.

So how does a credit card allow someone to optimise cash flow and benefit from using it? Let’s say you want to buy a refrigerator for $250,000, but only have $125,000 worth of savings, have $75,000 in disposable cash after paying bills from your salary, and a credit limit of $300,000 on your credit card. This means you are $50,000 short to buy the item. You could take out a hire purchase or credit arrangement with the vendor, but the total amount paid would effectively be probably $300,000 based on the arrangement.

One could purchase the fridge at the start of the new billing cycle on October 16, pay $100,000 immediately and have a $150,000 balance remaining. By the time your billing cycle ends on November 15, you would see $150,000 show up as your statement balance with $150,000 as available credit. Once you pay the balance before the due date around December 9, you aren’t charged any interest or penalties. This would effectively mean that you would have had kept cash on hand, spread the transaction over a billing cycle and not incur additional charges had one taken out a credit arrangement with the vendor.

This capital management can be extended further by using National Commercial Bank Jamaica Limited’s (NCBJ) or the Bank of Nova Scotia Jamaica Limited’s (BNSJ) buy now, pay later products. NCBJ’s Flexi Pay option allows someone to break up payments of $50,000 (US$300) or greater into 3, 6, 9 or 12-month payment plans. One doesn’t pay additional interest or programme fees when it’s only used for the three month payment plan. BNSJ offers Select Pay which allows you to convert transactions of $40,000 (US$250) or greater into the same 3, 6, 9 or 12-month payment structures, but there is a fee in any instance. Thus, a $150,000 transaction would result in a one-time fee of $1,500 and monthly payments of $53,408.30 for a grand total of $161,724.90. Even though one is paying $11,724.90 more over the three-month option, if one can put that money to work elsewhere and earn above that payment, it works out for the user.

Another great benefit of credit cards is the rewards programme offered to clients such as cash back, travel rewards, or special arrangements with particular vendors/companies. In the case of BNSJ’s Gold Mastercard, they offer four per cent back on groceries and gas station visits, two per cent at pharmacies, and one per cent everywhere else. As a result, one is being paid to shop normally and get a rebate to their card when it’s applied. If you shop with your debit card everyday, you would just use a credit card and repay the balance same time if one wants to be cautious and focus on risk. NCBJ’s Visa Platinum offers the ability to enter airport lounges for free and redeem points accumulated to book plane tickets to different destinations. Even the Miles app lets you use your accumulated points as a virtual card and spend it anywhere.

Thus, a credit card effectively benefits you once you pay the statement balance in full and acts as a good risk management tool with your funds. If your debit card is compromised with your funds, you might end up waiting three months to receive it back. If your credit card is compromised and you didn’t commit fraud, it’s the bank’s issue and you can just order a new card. So the next time you go out for lunch with friends and people are paying with cash, take the cash and pay with your credit card instead.