Friday, 12 February 2010

Credit Card Tips (2)

I was planning on continuing my post about insurance, but I decided I should not bore you with the same topic in the same week ;-)

So, I will talk about credit card in this post, and continue the insurance discussion next week.

Last week I talked about how to manage credit card payments when you have a sudden need to make a large amount transaction.

This time, I will try to discuss some points that should have been put forward BEFORE the previous post..

The things that should be considered by individuals or families before deciding whether they need a credit card in their financial life

Why should I have a credit card? My life is complicated enough without one!

This is a comment that I often hear and personally, I can't blame the people who are saying it! Credit card came into our world without the right 'first impression' and it ended up being used without the correct 'manual'..

The main ideas that people have about credit cards are:
1. you can buy the things you need/want now and worry about paying for it later,
2. the more you use it, the more 'bonus points' you will receive.. which you can exchange with various gifts when you have certain number of points, and,
3. you can have discounts at various places (supermarkets, restaurants, outlets, etc.)

Point number 1 is definitely the wrong idea, while points number 2 and 3, even though they are not wrong, still, these advertised purposes of credit cards ARE NOT the main purpose of credit cards! These are just the additional benefits of having a credit card..

The actual main purpose of credit card is TO BETTER MANAGE YOUR CASH FLOW because credit card:
1. has the ability to 'bridge' the timing difference between your salary pattern and spending pattern.
2. provides services that can assist your payment schedules
3. has the ability to provide a quick solution on emergency situations

So, why the banks (or other credit card issuers) never really advertised credit cards with their main purposes?

Well, isn't it obvious? It won't sell! People who have sufficient financial knowledge background probably have about half-a-dozen other alternatives that serve the same purposes with credit cards (financial managers, diversified financial portfolio, or even the simplest self-scheduled payment patterns, etc.) .. ;-)

However, for majority of people, credit card can still provide the personal 'cash flow management service' at a reasonable fee (the annual fee).

So, how does this work?

OK, let's take a look at this example..

Here is what a common family cash flow looks like

Date Details
5 Electricity Bill
10 Grocery Shopping
15 Phone Bill
20 Insurance (annual)
25 Salary

So, the person must go to the Electricity Company by the 5th to pay the electricity bill,
then, take money from ATM to prepare for shopping on the 10th,
then, go to the Phone Company on the 15th, and,
organise the insurance payment on the 20th.

Some people are okay with this monthly routines (either having an assistant or having the time to do these themselves), but.. some others might not have the advantages of having an assistant or time (especially living in Jakarta, lining up to pay the electricity and phone bills can take half-a-day each).

Some other people choose to have a direct-debit bill payment, which is the bills will be paid directly from the person's bank account. This method works well for people who have a same/similar amount of routine expenses to pay every month and high discipline to set the money aside, untouched for billing at the planned time.

Now, for people who are struggling with schedules, paying some of these bills late will mean DISCONNECTION of services (I'm talking about electricity and phone), while other necessities that come in-between salaries might cause a slight 'shake' of cash flow during the month.

For these situations, credit card is a good option to choose. Once you have listed your monthly bills that you want to be paid through credit card, your credit card will always pay them on time and you will never be late in paying your important bills.

Nowadays, some banks offer the billing date options too for your credit card. You can choose whether you want to be billed on the 10th, 20th or 30th. You can ask your bank about this service and decide which date is better for you (depending on your salary date).

Now, you only need to take ONE trip to the ATM to pay the credit card bill and that's it!

The advantage of centralised billing is that you can easily track your spending trends and make future plans. You know how much you spend on your routine expenses (based on your credit card bill and statement) and you can make plans with the rest of your salary -for savings or holidays, etc.-..

Alright, that was about the 1st and 2nd main purposes of credit card. Now, we move to the 3rd main purpose.

Referring back to my previous post on credit card, it was clear that health treatment in a case of emergency can be arranged more easily with the presence of a credit card.

Most hospitals (especially private ones), require either a health insurance membership card or a credit card to prove that patient CAN cover for the health treatment provided by the hospital. Without either of these cards, patient can be held untreated for a long time! Certainly we do not want this to happen to ourselves or our loved ones..

Some credit card actually have hospital plans for hospital treatments or hospitalisation, where the total bill can be paid in installments; 3, 6, 9 or 12 months (or even longer periods of time). You should ask about this when you apply for a credit card.

Are there other important benefits of credit card?

Nowadays, credit card issuers must compete against others in providing better services to the credit card holders.

Most credit cards now have formed partnerships with various shops and outlets in providing planned purchase service. With this service, credit card holders can purchase goods without paying in full at the time of purchase, instead they can pay in installments over certain period of time.

What you need to remember is that, while this is a great way to purchase things that you need without shaking your cash flow too much in a certain month, you still need to be careful about:
1. the real necessity of the the goods you are purchasing
2. the amount of money that you will have to commit to pay each month until you have paid the goods in full.

Moreover, these planned purchases are sometimes accompanied by a small interest (although a lot of credit card now offers 0% interest for planned purchase). If this is the case, then you need to think it over, whether you should purchase the goods you need with your credit card, or just save up for a few months and purchase it with cash (the money you have saved).

When the goods you are purchasing are for your small/home business (equipments, inventory, etc.), then the small interest might still be worth it. But when it is for something that you will only use for leisure (home entertainment, etc.), then you might want to look around for alternatives before you make you purchasing decision.

The main idea that you need to remember is that credit card is there to provide simple financial management assistance to individual or families who need it, NOT to make your life more complicated.. :-)

Have a nice day!


  1. Interesting to see how you do it in Indonesia. With regard to paying regular bills for utilities our banks encourage us to have an extra account in which we pay every month 1/12 of the expected annual expenses. So there's always enough money to pay the bills. Credit cards can be a very big temptation...

  2. Some people choose to have an extra account to pay bills here in Indonesia, combined with the direct-debit system. However, the minimum balance that banks apply for each account, makes it hard for people to have more than 1 account, as a lot of people need to able to use the full amount of their salary for their monthly needs..

    However, whenever the bank fails to withdraw the amount to pay the bills, or the system somehow makes a mistake, then it would take months to rectify it, while the person still needs to make payments of the bills due.. which can result in late payments or double payments that cannot be returned..

    While with credit card, we have 14 days from statement date to clear out any problems with any transactions in the statement.

    It is also hard to predict the 1/12 of annual expenses, since in Indonesia, electricity and phone rates are getting adjustments almost every 3 months, so, most of the time, we just have to pay whatever we are billed with each month..

    Personally though, when the system is more stable here, I agree with you that having an extra account for paying bills is a better approach for family finance management.


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