Credit card use – island approach and its advantages
As of April 2010, at least quarter of the American population had bad credit, according to reports from FICO. As of March 2011, Americans were also found to be revolving debts to the tune of $796 billion, where most of it was credit card debt (as per reports from the Fed Reserve). Hence, it is easy to see that people in general, seem to be having a hard time in managing their personal finance. If we have to go by the facts presented by the National Foundation for Credit Counseling’s 2011 Financial Literacy Survey, then the statistics are quite startling. Around 28% of the American population admits that they never pay their bills on time, 56% admit to not having budgets, and 22% are clueless about the amount they spend on food, housing, entertainment etc. Hence, it would easy to note that one cannot squarely blame the Great Recession alone. But, it is up to people to understand how they budget their expenses. It is important to maintain some amount of financial discipline and clarity. It is also important to find ways to lower the debts. One of the best strategies that consumers should adopt is the Island Approach while using the credit cards.
The Island Approach was initially introduced by a website that does credit card comparisons and the entire concept was based on compartmentalization. According to this concept, consumers are advised to create different segments based on their financial needs – making daily purchases, revolving debts, and earning rewards on various credit cards, like they were on different islands.
This approach suggests that revolving debts should not be kept on the same card with which you make your daily purchases, because by doing this you will never be able to gauge if you are spending way beyond your means as purchases will get covered in the huge pile of debt.
When you isolate different types of transactions, you can lower the cost of debt in different ways. You can get the lowest rate of interest on every transaction you plan to make as you can find a card that will offer 0% on balance transfers as well as purchases.
If you use different cards, you can also lower the interest-bearing balance, rather than using a single card for revolving debt as well as making purchases. The Island Approach is helpful for small businesses as it helps in providing debt consistency as well.This is the best option to get out of debts quickly and also to maximize rewards.
