Question: Is it a good idea to use a credit like a regular bank account?
Credit cards are a staple of financial convenience and flexibility, offering you the ability to make purchases or borrow funds up to a set limit. However, the function of credit cards goes beyond mere transactions. They provide intricate financial mechanisms and potential uses that might not be immediately apparent.
This article explores whether you should deposit money into your credit card and treat it like a savings account.
How does a credit card work?
Credit cards function as a revolving line of credit. Your spending limit is determined by your creditworthiness, which is influenced by factors such as income level, credit history, and repayment habits.
Accepting deposits and payments into your credit card account
Banks can accept deposits into a credit card account. However, your employer will likely be averse to paying your salary into your credit card account and may insist on using a savings or current account.
Using a credit card like a savings account
Using a credit card as a savings account is unconventional and not recommended due to the absence of interest growth and the potential for financial mismanagement. Credit cards are designed for spending and borrowing, whereas savings accounts are intended for accumulating funds and earning interest thereon.
You won’t save money by over-crediting your account
Using your credit card as a transactional tool by pre-funding the balance and avoiding reaching your credit limit allows you to make purchases without incurring interest charges.
However, the same benefit applies if you pay the outstanding balance on your statement in full each month, on or before the payment due date, typically within 55 days.
Bear in mind that by using your credit card and simply paying back the outstanding balance within the interest-free period, you can increase earnings on any linked rewards programme. It also helps you build a solid credit history.
Earning interest on a credit card
If you use your credit card account as a savings account and pay more than you owe, that is, have a negative credit balance, you can earn credit interest. This is often at a tiered rate, depending on the amount.
It’s unlikely that you’ll earn more interest from a balance on your credit card than from money in a high-yield savings account, so do your research before attempting to use your credit card to earn high interest. It’s wise to compare the interest you’ll earn with what you’ll get from a savings account to ensure you get the best rate.
Keeping “extra money” in your credit card account will not improve your credit score
There’s a misconception that having extra money on your credit card will improve your credit score. It won’t. Your credit score is influenced by factors such as payment history, credit utilisation, length of credit history, types of credit in use, and new credit inquiries.
Overpaying on your credit card could trigger a fraud alert
A large negative balance could be a sign of money laundering, and this may cause the bank or credit card company to become suspicious of your transactional activity.
Understanding how credit cards work, and considering whether you can deposit money into your credit card to use it as a savings account, requires a clear grasp of financial principles and personal money management. While credit cards are convenient and offer numerous benefits, they’re not designed to serve as savings vehicles.
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