Most people dread credit card debts, and rightfully so. In Singapore, for example, the national average for credit card debt is around $1,400 or S$1,900 per household. In the United States, it’s even higher at $6,200 per family. Because of the misconception about credit card debts, the normal reaction for people is to stay as far away from them as possible. Unfortunately, unless you are the heir to a large fortune, you are going to need to use that credit card, whether for some frivolous expenses such as a nice handbag or an emergency such as a medical procedure.
This is why having that credit card in your wallet is not at all bad. There is a practical side to having and using a credit card. Aside from the fact that it’s safer to use a credit card than bring your cash around, using the card has a lot of perks, too, especially if you know how to maximize the rewards card that comes with a credit card.
What’s a rewards card, you might ask? It’s usually a part of a credit card promo—the bank offers you a rewards card linked to your credit card account. Every time you use a credit card, the rewards card generates points. You can use those points for a variety of things such as airline tickets, shopping coupons, hotel accommodations, and many more.
You might think this is all there is to it in using your credit card and getting rewarded for it. Sure, that’s not a good reason to get into a large debt. But if you’re already going to use your credit card, you might as well make the most of it, right? Just remember to use the right card for your purchases, know what doesn’t generate points and avoid it, and calculate before you redeem your points.
Zero debt is good for your savings account, but it doesn’t look good on your credit history. It only means for lenders that no one has trusted you with a loan yet. It means your capacity to pay off a loan is untested. How can they be sure that if they approve your loan, you are going to pay it? Sure, you might find some lenders who are willing to sign that loan agreement but only for a small amount, and the interest could be high despite the zero debt.
The lenders need to know that you can be trusted with money. Your credit history should show how much debt you incur every month and how you’re paying them off on time. That will also pull up your credit score, making you eligible for better deals.
This will help you get home loans and car loans. How are you going to afford a house or a car without a loan? But before banks can approve your loans, they have to see that you are fiscally responsible with something as simple as a credit card debt.
Finally, debts are not a big thing if you know where to use that money. If you are applying for a personal loan, so you can invest that money either in real estate or in a small business, then that’s a risk you have to take. It’s a good risk, too, since the plan is to generate enough income that the debts will pay themselves off. What other types of investments are being in debt worthwhile?
If you put money in stocks or mutual funds, that’s a great way to use a loan. Just make sure that you buy the stocks when the market is down, so you can profit once the market pulls itself up. Of course, with the stock market, there is no guarantee, so crunch the numbers first before you dive into it. If the numbers don’t look great (meaning, you will pay more interest than make a profit after selling the stocks), then don’t get into debt for it.
Everybody is in debt. Even billionaires use credit cards and apply for loans. They don’t pay for those multi-billion properties with cash. They apply for a loan and pay off that mortgage as any normal person does on a monthly or quarterly basis. Don’t think that just because they are swimming in cash and earning it fast, they aren’t spending it as quickly, too. Debts are good when you know how to make the most out of them and generate sources of income from them. Debts are only a problem when you don’t pay them on time, and you let them balloon.