The Benefits of the Interest-Free Credit Card

For those on middle incomes or above, interest-free cards can be beneficial. You can build up your credit history by making most purchases using the card, and then paying off the card in full each month.  Many of these credit cards provide you with generous reward programs, including frequent flyer points.

You should try to get the maximum interest-free period you can find.  Some are up to 55 days, giving you longer to pay off purchases. For information on credit card offers go to
http://www.creditworld.com.au/low-interest-credit-card.html.

While you are living off your credit card, you should have your salary paid into a high-performing transaction or cash management account. You then pay off credit that has reached 55 days or whatever the period is. You will of course need to make payments to any other loans you may have, such as mortgages. For information on banking products go to http://www.creditworld.com.au/bank-accounts.html.

In finance terms you are creating your own ‘spread’. In effect you are buying your funds from Visa or MasterCard at 0%, and selling them to your bank at around 5 to 6%. The reason you can do this is because of those undisciplined credit cardholders who only pay the minimum monthly balance or close to it. The interest they pay funds your interest-free card with its great reward programs.

Credit card companies also securitise debt and sell it back into the capital markets as bonds. The companies need a certain mix of cardholders to bring their risk profile to an optimum level. They need the minimum monthly balance payers, who have long-term outstanding balances, and who contribute the largest returns, and yet are most at risk of credit default and bankruptcy. These cardholders are known as ‘low rotators’.

Credit card companies also need ‘high rotators’, cardholders who pay off credit in full once the interest-free period has expired. The companies need the right balance of both types of cardholders. If there are too many low rotators the risk is unacceptably high to the credit card companies, but if there are too many high rotators, the companies’ returns will not be high enough to make substantial profits. The optimum ratio appears to be 2:1 in favour of the high rotators.

Low rotators should aim to become high rotators, and stopped paying for the prosperity of others. If you can only pay the minimum monthly balance, you are better off cutting up the card, and then, month by month, you can gradually pay your credit card off and be debt-free.

If you have got a job with a better salary you should consider switching to a credit card with an interest-free period and a generous rewards program.  If you have more than one credit card, you may be better off just having the one high-performing card. You probably should also destroy any high-interest store cards that you have, as you will have rewards points to purchase goods.

Summary

• Credit cards with interest-free periods and generous rewards programs are beneficial for disciplined spenders who are on a reasonable income.
• You should aim for the maximum interest-free period, which is around 55 days.
• You should have your salary paid into a high-performing savings or cash management account and live off your card, paying for your credit from the account when the interest-free period has expired.
• Cardholders who only pay the minimum monthly balance fund the interest-free cardholders through the interest they pay.

Article correct at its author date: Jan 2007. Copyright Virtual Office Space, Any unauthorised reproduction of this article will be prosecuted to the full extent of the law. Credit Cards Australia.

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