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Why Using Credit Facilities Can Induce Responsible Behavior
It is generally believed that if one is allowed to use credit facilities to pay for his expenses, things can possibly spiral out of control he would soon be spending money in a most irresponsible way.
Recent studies however, have shown that a person who uses credit facilities like credit cards tend to be more responsible than they are thought to be.
As mind-boggling as that may sound to a lot of people, there are actually quite a few justified reasons behind this reasoning.
Buy now, pay later
Credit facilities like credit cards will generally allow you to repay the owing amount after a certain period of time after the transaction is made.
Most card issuing companies allow an interest free period of around forty five days to return the amount. Failing which an interest is being levied on the outstanding balance.
You might then be wondering how then does banks that issue these cards make money?
They make most of the dough from charging a transaction fee on the merchant accepting payment from these cards.
The bulk of revenue does not come from their annual fees or interest charges. But from the volume and size of transactions swiped from the card.
Carrying on from the previous paragraph, a responsible person would be smart enough to keep his money in the bank for this period of one and a half month and let the money grow before he would go ahead and pay the credit card bill.
Because if we are to crunch the numbers like a seasoned war tactician, you are in fact practicing the exploitation of leverage at the most basic level.
Once you made a purchase for $100, you would have 45 days to pay back the money. Within this 45 days, you can theoretically put that $100 in a 1-month fixed deposit (since you are still in possession of it) to earn a small interest.
Once the deposit matures, you get a lump sum of your initial cash plus interest earned.
In actuality, you will end up repaying less than $100 since you have earned a “rebate” from the fixed deposit.
Instead of paying instantly after a purchase is made, it is obviously a smarter choice and shows responsibility of a person when he pays the money after a while closer to the due date.
If you are savvy and don’t mine the extra hassle, you will be able to create all sorts of situations where you can squeeze out extra cash out of nothing by playing with these payment period.
It’s all legal by the way.
In fact billion dollar corporations make a lot of money from collecting sales proceeds and delaying payments to their suppliers and vendors for up to 180 days.
This allows them free usage of the sales proceeds which can be deposited into time accounts and buy even more stocks.
Basically if a well-oiled company is able to turnover inventory in around 15 to 30 days, this means that delaying payments to suppliers for 180 days allow them to multiply their profits by 6 to 12 times.
This is a simple concept of leverage and cash flow.
Professionals like to call it as working capital, but they are essentially the same thing.
Using more money than you have by gaming payment terms to maximize operating revenue.
Keep a track of all the money you have spent
If you want to keep a track of all the expenses that has been made on a daily basis, the credit card statement is the best thing to do so.
And it is done for you for free.
It will provide you with the list of payments and will help you understand what has been your major area of expense.
Also, analyzing the bills for a few months would actually help you realize what are the areas where you have been spending more and where you need to cut down.
This will bring in the sense of responsibility regarding your expenses.
Why keep an old scrap book and needing to update it everyday with your spending when you can get the bank to do it for you professionally by using their cards.
There will no longer be a need to handle petty cash.
As long as you pay your bills on time, the bank is effectively your personal expense accountant at no charge.
There is also the little advantage of building your credit record while you are at it.
When you consistently use credit facilities and continuously make full payments in a timely manner, one day, you might realize out of the blue that your credit score is bursting off the charts.
This is extremely desirable when you are trying to get approval for bigger facilities like mortgages, long term cash advances, business credit lines, etc.
Credit scoring is basically a quick model used by lenders to judge the credit-worthiness of a potential borrower. They can depend on attributes like age, occupation, marital status, etc.
But the most important criteria will be the repayment history of financial liabilities. Information include partial payments, full payments, structured settlements, bad debts, late payments, etc.
A real time tracker
Most credit facility companies provide you with real time updates of the transactions made so far in the current month.
All you need to do is log into your account from the internet to view real time information.
Even better, with banks going mobile while trying to outdo one another, you can check your accounts from the comfort of your smart phone.
It will help you keep a constant tab on the real time expense and you will automatically become cautious when the red line is approaching and cut down on the spendings in the current month.
This sense of responsibility would automatically get induced into an individual once he starts using credit cards.
Get rewarded with reward points
Many credit card issuers also offer reward points which can be either redeemed to get some gift or get flying miles which can be utilized while making purchase for air tickets.
Anyone who uses these cards would want to make full use of this benefit and get the maximum out of it.
This again would cultivate responsibility on balancing expenses and earn reward points.
There is always the threat that one may go overboard and spend a lot of money when allowed free use of credit facilities, however as discussed above this habit can actually make you more responsible towards your monthly budget.
Studies have shown that the younger generations who are more savvy using credit cards are much more responsible than the middle aged ones.
Finally, let’s sum it up by stating that credit cards are not evil. It is the abuse of it that creates financial and family problems.
And if used the right way, it can teach people, especially kids and teenagers, how to be responsible with money.