Credit Cards As A Powerful Wealth Tool?

By Adam Khoo

In fact, when used properly, credit cards are a very powerful wealth-building tool! I use credit cards for every single possible purchase.

By using credit cards you get...

1. A two-months interest free loan. When you buy a product using your credit card, you will only be billed for it at the end of the month. You are then given another month to make payment. So, if you pay off your total bill, you would have effectively gotten a two-month interest free loan.
2. Bonus points and dollars. Each purchase you make on your credit card(s) will earn you bonus points which you can use to redeem for free products and services like extra flyer -miles and dining vouchers, saving you even more money.
3. A monthly statement that tracks and consolidates all your expenses. At the end of every month, the credit card company will tabulate for you the total expenses for the month, making it easy for you to track your total expenditure. So it becomes a free money management tool.

However, you MUST ALWAYS PAY THE OUTSTANDING BALANCE when you pay the full balance every month. This way, the bank does not earn a cent off you, but you get the three great wealth building services mentioned above. This is what I do and that is why my bankers hate me.

So why do banks go all out, giving freebies and spend millions of dollars in advertising to hook you on using their card? They know that there are many consumers out there who just pay the minimum sum every month (about 3% of the total debt you owe), because it is so tempting.

What's worse is that many credit card owners don't even pay their minimum sum on time because of a cash crunch or because they plain forgot.

The moment you pay only the minimum sum and allow your outstanding balance to roll, you become the bank's best friend. This is when they will make a killing off you! Why?

This is because banks charge a 2% per month interest on your outstanding sum. This may seem small, but again, that's 24% interest a year. Just how much interest does this add up to?

Let's do the sums...

Question: Imagine if you had an outstanding balance of $2,000 on your credit card statement, and you just pay the minimum sum of $60, how long will it take for you to pay off the while balance? (this is only assuming you do not charge a single dollar more).

The shocking answer: It will take you 4.5 years! You would have paid a total of $3,300, that's $1,300 in interest. In other words, you would pay an actual interest rate of 65% off your balance.

So when used properly credit cards can greatly assist you in creating wealth or it can destroy you if abused.