Avoiding credit cards because of the high-interest rate is recommended that you may have already heard or read. However, depending on your financial situation, relying on a credit card may be a good option. As long as you know when to use a credit card, you’ll be just fine.
According to most experts, buying in cash is the best option when you have the money available, as it can guarantee a discount so you can save money. However, sometimes using a credit card may be necessary and more advantageous.
When to use a credit card
Here is an ideal situation to know when to use a credit card or cash in buying things:
If you have the money available
If you have saved to purchase or have an available balance in your account to make a purchase, using a credit card is less advantageous than making a cash purchase.
The great advantage of buying in cash is that it is possible to save money, as the vast majority of merchants offer reasonable discounts for those who choose this payment option.
However, if your money is invested, perhaps using a credit card and buying in instalments may be the best option.
To be sure, what you need to do is to evaluate if the cash discount is greater than the cash yield and the interest embedded in the instalment purchases.
For convenience, you can use a shopping simulator. There are several such tools available on the internet; do your research.
To better understand how this simulation works and decide when to use a credit card and make an instalment is the best option, we will exemplify for you.
When is it better to make the purchase through an instalment and leave the money applied?
Let’s say you have your money invested in Treasury Direct and want to buy a new TV. Still, you haven’t decided whether it’s worth withdrawing your investment money and buying or using your credit card and keeping the money yielding.
When researching the prices of the television you want, you have seen that the best price is $1760, divided into up to 10 instalments of $176, without interest.
In this case, doing the math, you can see that using the credit card and buying in instalments is more advantageous than the view, allowing you to save $73.11.
The difference, in this case, is that the yield on the money invested is higher than the interest on the instalment purchase, so it is more worth keeping the money on the application than withdrawing it to make the cash purchase.
In general, when the instalment is interest-free, using a credit card is a good option, primarily if the money is invested in an investment.
When is buying in cash the best option?
Now let’s imagine a different situation when using a credit card is not worth it and buying cash is the best option.
You still want to buy the same television, but searching the internet, you realize that you can buy it for $1584 or in a ten times instalment of $176 per month.
In that case, using a credit card is not worth it. It is better to withdraw money from the application and make a cash payment.
Buying cash, in this situation, the economy will be $118. This is because the income from the money invested in Treasury Direct ends up not being more significant than the discount obtained by the cash purchase.
Depending on how the money is spent, it is better to buy cash or term.
Now let’s think about a different situation. Let’s say you want to get a new refrigerator and you have a certain amount of money in your savings account, but you still don’t know if it’s worthwhile to withdraw the savings and make the cash purchase or use the credit card and instalment purchase.
Searching, you found the refrigerator you want costing $3420, and you can split the purchase in 12 times $300.
In this situation, you will find that the cash purchase is more advantageous by doing the math since you could save $60.57.
However, if the money was not being invested in the savings account, it is an investment that offers a higher monthly income than the same.
In this case, purchasing in instalments would be more worthwhile, with a savings of $31.26.
Even at first glance, the values here seem minor. If you think long term, these small savings with each purchase will significantly impact your financial life.
Things to consider when to use a credit card or pay in cash
As you may have realized, to know if using a credit card or buying cash is worthwhile, you should evaluate certain factors such as:
- The price of the good to be purchased in cash
- The value of the instalments
- Interest on instalment payments
- If your money is stored in a financial application
- The yield on any financial investment
- Whether or not the yield on the investment exceeds the instalment interest rate
Another factor that you should be careful to consider is when instalment is the best option. You should also be careful not to accumulate multiple purchases to pay within the same period.
This can compromise more of your budget than what you can afford each month.
Therefore, before starting a new instalment payment, it is important to pay off the previous instalments. Otherwise, you may have problems.
If you have no money invested in an investment, the best option is always to buy in cash, as you will hardly find a loan option that has lower interest rates than those charged on credit card instalments.
Tips in maximizing the benefits of using credit cards
Another factor that may make using a credit card to make a purchase more advantageous is when the card service offers specific benefits to the customer.
To enjoy these benefits, however, you must use the card with discipline and planning.
Your credit card can even be a good ally when you need to make a higher value purchase, especially if the good costs more than half of your monthly income or if you can’t find a good cash discount.
When you are out of cash in your checking account at the end of the month, your credit card may also be helpful to cover any eventuality or purchase items needed for you, such as grocery or fuel, for example.
1. Choose when to pay.
One of the significant advantages of buying on the card is that you can choose the day you pay, but ideally, you should choose a date close to the date your paycheck is paid.
If you don’t want to curl up with the bill, the tip is to keep up with your small credit card spend weekly. For this, you can bet on the finance control app. There are many available.
2. One card is enough.
One more tip for using the card wisely is not to have many cards. You do not need to collect credit cards. If you have many, it won’t be very easy to control your spending. Ideally, have at most two.
If you have income that you earn on different days, you may have a credit card option that expires on receipt of each. If you only have your salary, having only one card is ideal.
3. Remember to pay your credit card bill always and on the due date.
Interest on your revolving card or overdue charges is high and can cause your finance to break down. If you can use the automatic debit option, this is a good alternative.
If there is no other way and you have to install some card bill, you no longer use this payment option until you make this instalment.
One of the biggest mistakes you can make is using your credit card after not paying the last instalment payment.
In today’s article, you learned about situations where using a credit card is most advantageous and when it is best to opt for cash payment. This is so you can send money more consciously and better organize your finances.