Credit Cards - Love 'em or leave 'em?

I have always thought credit cards were great - I bought a house on a credit card once, up in Burnley, when the old stone built terraces were selling for about £15,000. However you need a well structured approach to your finances, to use credit cards to your advantage and make sure you can save the hundreds of pounds available. If you’re disorganised and don’t pay the bills on time, or borrow money on cards at 17-20% a year they can be a financial disaster.

One of the main advantages of using credit cards is to make your life easier. If you’re running a dental practice, I would recommend having at least two cards, one for anything to do with the practice and one for personal. This means that at the end of the tax year you just give your accountant 12 statements rather than having to go through every statement line by line.  Having a dedicated card for practice expenses also makes it easier if you export your statements to an on-line accounting package like Xero.

Credit card companies offer lots of incentives such as: money back; air miles; guarantees on your purchases; free credit every month, or in some cases up to 12 months; point reward systems; free insurance; affinity discounts; lots of advantages when you travel as well as the obvious one of not having to carry cash around with you. I just received £420 of Amazon vouchers in the post from my credit card provider, although this was the first time I'd claimed in a few years.

So for people that prefer to avoid paying interest, and repay the balance every month, credit cards can offer fantastic value for money.

Build or Rebuild Your Credit Rating
If you’re a young dentist and you haven’t got a credit card it might be an idea to take one out. Not so you can splash out on a new car but just to start building up a good credit history. Provided you make a few payments on the card and pay off the balance every month your credit rating will improve. To avoid ever missing a payment and getting a black mark in your credit history I always recommend setting up a direct debit. Your rating with the credit agencies will soar if you do this for a number of few years because you are seen as a borrower who always repays on time.

Good debt / Bad debt

I have clients that have used credit cards to supplement their income so they can afford to send children to private school, travel to exotic holiday locations, and buy the latest ‘must have’ item. Provided you can afford to pay off the balance at the end of the month that’s fine, but if you can’t you’ll be building up consumer debt or ‘bad debt’ which you’ve guessed it, is bad.

Good debt though is where you’re using the cash released to buy assets. Assets are anything that can put money back in your pocket, so this could be investment property, shares, bonds, and for example any dental courses or training which will eventually help you to offer more or better treatments to your patients and earn more money.

Balance Transfers
Many credit companies will transfer your credit balances at 0 per cent for 12-18 months just to attract you as a customer and hope to make money off you at the end of the period or by selling you related products.

There are typically hundreds of credit cards that offer the chance to transfer balances but watch out. They charge fees to switch, ranging from 1.7 per cent to 3 per cent and the fees keep increasing as more customers get switched on to the deals available.
If credit card companies will lend you money at 0 per cent, you can save it and earn interest on it, reduce the costs of financing practice equipment, or even use it to reduce your mortgage. Assuming a credit balance of £10,000, transfer fees of 2.5% and an interest rate of 6% you’d be saving £350 a year simply by having the debt on a 0% card. We actually had a client once that was doing this with a £60,000 mortgage on a £350,000 property – and he was paying no interest! Takes a bit more work but for a £2,000 a year saving some might consider this worth a couple of phone calls a year.

Payment Allocation
If you plan to spend on a card after transferring a balance to it, be aware of the order of payments – the sequence in which different parts of your balance are paid. Most credit card providers use your payments to clear the cheapest debts first, allowing interest to continue accruing on more expensive borrowing such as cash advances. Nationwide however is one of the few providers to allow the most expensive debt to be paid off first.

So provided you do your homework, you should be able to make more money out of the credit companies than they can out of you.

Original Article posted in the Dental Tribune
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