Last Friday, we had a great discussion about the socio-economic implications of credit-card rewards programs (or lack of implications, depending on your viewpoint). The conversation wasn’t nearly as tedious as my description makes it sound.
In response to that article, Califia e-mailed:
[Could you provide] a quick elaboration of this statement from your recent post: “I’ve gone from anti-credit-card to pro-credit-card — but only for those who can use them responsibly.” How do you define “responsibly”? Why did you change from anti to pro?
I think I’ve written plenty about the Whys behind my switch from anti-credit card to pro-credit card. But it occurred to me that I’ve never really elaborated on the Hows.
Essential credit card skills
Two years ago, I summarized a Consumer Reports article about essential credit card skills. Those skills include
- Learn to read the fine print. Read the legal stuff when you fill out the application, when you receive the card, and on any future mailings. Credit card terms and conditions can be confusing. This credit card glossary from Wells Fargo can help. If you don’t understand something, ask for help.
- Similarly, review your statement every month. Due dates, fees, and interest rates are subject to change. Reconcile transactions and keep an eye out for fraud. Many people — and I’m one of them — actually check their statements online several times a month. By paying attention, you can prevent small annoyances from becoming large hassles.
- As always, don’t be afraid to speak up. If you notice something strange on your bill, call customer service. If you want to dispute a charge, call customer service. If you want a rate reduction, call customer service. It never hurts to ask.
- Be wary of the special offers your credit card company sends you. Understand the teaser rates. Beware offers to skip a payment. Be suspicious of other products the company tries to push: insurance, fraud protection, etc. Many of these are bad deals for consumers.
- Finally, pay your bill on time and in full every month. If you are not yet in credit card debt, don’t start. Don’t rely on credit cards to support a lifestyle you cannot afford. Don’t resort to using a credit card because you can’t afford to pay cash for something — use a credit card because you can.
These skills are all rather academic. They’re important, yes, but they don’t address the behavioral issues that lead to credit card debt. It’s one thing to say “pay your bill on time and in full every month”, but it’s another thing to actually do it. What most people need are real-life methods for using credit cards without going into debt.
Essential credit card behavior
I can’t speak for everyone, but I know that for me, I had to adopt an actual set of written guidelines to define what acceptable credit card behavior would look like. No joke. When I decided to re-enter the world of credit cards in 2007, I was very nervous, so I set the following ground rules:
- I resolved to make my decision to buy first, and then decide how to pay. This may seem like common sense, but it used to be that I’d let the fact that I could pay on credit influence my decision: “I have a credit card, so I can just charge it and pay later.” Now, however, I decide whether or not to make a purchase, and then I decide which payment method makes the most sense for me: cash, credit, debit, check, etc. (I do this because research shows folks tend to spend more with credit than with cash. I’m sure that I’m not completely negating this effect, but by putting the buying decision before the payment decision, I’m hoping to mitigate the overuse of credit.)
- I vowed never to buy anything unless I had cash in the bank for it. In other words, if I see a new videogame system that I want, I won’t buy it on credit if doing so means that I have to wait for cash to come in. Or, if I decide to take a safari to South Africa, I don’t make the purchase unless I already have cash in the bank to cover the entire expense. I only use credit if I could actually pay with cash. (Why not pay cash then? Because often credit is more convenient, and because by paying with credit I get 1% cash back.)
- I promised to pay my card in full every month. This goes back to the last item in the list above: I never carry a balance. This is my number-one rule. Everything else is secondary. When I decided to try using credit cards again with rewards cards, I vowed that if I ever carried a balance, I’d cancel the card. It’s been over three years now, and I’ve never carried a balance. (Well, I did carry a balance one month, but that was due to typo when I was paying online. It was something like a $27 balance, and it was because I have fat fingers not because I was out of control with credit, so that didn’t count.)
- I told myself that I’d never use my card for an impulse purchase. One of the things that got me in trouble with credit during the 1990s was impulse spending. And while I still struggle from an impulse to spend, by not using credit, I limit myself to the cash I have in my pocket. (I try not to use my debit card for impulse spending, either.)
Despite these careful steps, I do sometimes worry about my use of credit. Research shows that people tend to spend more with credit than with cash? Am I doing that? Is my use of credit hurting local businesses? (My wife and I refuse to use credit at the local coffee shop, for example, because we’ve talked with the owner and we know that merchant fees for card use hurt his business. We always pay cash when we buy from him.) And by using credit, am I feeding the monster of predatory lending?
I’m still wary of credit cards, and I don’t think they’re for everyone. I often say that credit cards are the chainsaws of personal finance: If you know what you’re doing and you treat them with respect, they can be a useful tool. But if you’re not careful, they can cause a lot of financial damage — and they can do it quickly.
Credit cards are not a source of free money, and you shouldn’t treat them as such. Credit cards are tools that allow you to use the money you already have in different, more efficient ways.
Here are some related sites from around the web:
- What are the best credit cards for you? How to choose a credit card the sensible way.
- Tired of credit card offers in the mail? Use OptOutPrescreen.com to get off the credit card company mailing lists.
- If you struggle to use credit cards wisely, it’s vital that you track your spending. Use a program like Quicken or Mint to track your shopping habits so that you can make adjustments as needed.
Finally, whenever this topic comes up, I’m reminded of one of my favorite old educational films, “Wise Use of Credit“. But while this 50-year-old movie has some great advice, it’s also fairly outdated. Credit cards were new then, and nobody had a clue what they’d become.
This article is about Basics, Credit Cards
JD, Great post. I have been paying off my credit card in full since I was old enough to have one – I can’t understand how people can justify not doing this when the rates are so extortionate!
I don’t know if you are allowed to do this in the US but here in the UK we can just call up our credit card company and ask them to set up a direct debit for the full balance of the statement, every month on the due date. This way you *never* carry a balance, fat fingers or not
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If you consistently track your spending (I use YNAB), you shouldn’t have any problems using a credit card. This is because you are spending based on how much you have available to spend.
As Ramit Sethi often says, it’s all about the psychology of money (not just the numbers as J.D. said above). Even though I use a credit card for just about everything, since I know it is coming out of my budget, for me it “hurts” just as much as if I paid using cash. So while I can see that for many people paying with cash helps you spend less, I don’t think that is the case for everyone, myself included.
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Just being able to pay off your credit card each month is not enough. I have clients who dutifully pay off their credit card bills each month but aren’t hitting their savings goals. If you are using money that should be earmarked for other purposes to obey the “rule”, all you are doing is delaying the time until you are forced to go without or go into debt. I have yet to see someone gain more from the “rewards” than what they should have saved to successfully meet their savings goals.
I recommend they figure out how much they can afford to spend on discretionary items and set it aside in their bank account. If they can’t pay their credit card bill off with that money they’ve set aside, we have a serious talk about what’s really important to them. This talk inevitably leads to the end of credit card use on a regular basis.
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I remember I think a Facts of Life episode way back when I was a little kid where one of the girls gets into trouble after she gets a credit card. Looks like I remembered correctly: http://www.tv-links.eu/tv-shows/The-Facts-Of-Life_254/season_8/episode_14/
Back from 1987. She figured out her problem remarkably quickly given how long it takes folks to realize they have a problem these days.
I wonder if any modern sitcoms have had the same message, or if they all take credit card debt as given.
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@J.D.
I can’t believe there are people who need seemingly common-sense things explained to them, but good on you to provide the info.
@Nicole
Awesome find on the 80s tv. I’m afraid I can’t answer your question about today’s sitcoms because I downsized the tv out of my life 3 years ago. No matter, everything I needed to learn about driver’s ed and the dangers of caffeine pills, I learned from Saved by the Bell.
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Well, now I have a “facts of life ” earworm.
I wonder if most people know that the merchant pays Visa/MC for allowing them to take credit/debit. That’s one reason I try to pay cash for smaller purchases/ un chain store purchases.
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@6 Gretchen
Me too, me too.
There’s a time you gotta grow and show you’re growin’ now…
Ah, Saved by the Bell. Saturday mornings just aren’t the same anymore. It’s all right.
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I agree that keeping track of spending and vowing to pay off in full can help avoid credit card problems. I was always afraid of spending more because of credit cards, even if I pay off in full, but found that with a strict, written budget and only spend what you budget for each month, it doesn’t matter if you spend a little more on the cards. Sure your money won’t go as far, but you won’t have too much debt. And a few months of money not going as far will certainly open your eyes on overspending and help cut that out too.
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@nicole – thanks for the book suggestion on my blog too. I’m going to post a response on SAFTM, but I think I’m going to take you up on the offer!
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I have two credits that award me reward points through a frequent user system, and I use them as often as I can in order to maximize my “rewards”, however, I never carry a balance — in fact — I don’t even carry a daily balance. I use Quicken to track all of my banking and expenditures. Thanks to the convenience of online banking, when I make a purchase on a credit card — not matter how big or small — I transfer the money over from my checking account to the credit card within 24 hours of the purchase. I also have a rule that a credit card is a payment convenience and a way to earn rewards of some kind from everyday purchases that I would normally have to make anyway. My checking account pays me no interest anyway, so I’m not losing anything by transferring the money over each time I make a purchase. I never have a surprise balance to pay, and I track my spending in real time. My checking account reflects my actual expenditures. So that’s my trick – don’t use a credit card for “credit” — use it as payment tool and a way to gain rewards. Use it at the grocery store, the coffee shop, etc, but just pay for every expenditure you make on it within 24 hours and don’t buy what you can’t afford to pay for within that 24 hour period.
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It seems as if there are all these “rules” for using a credit card when really it should be as simple as this:
1. Use credit card for purchases
2. Receive monthly bill
3. Pay bill in full
4. Repeat
If more people made a conscious decision to live within their means there wouldn’t be so many issues with credit cards.
With that said, I do understand that every person’s situation is unique. I don’t want to seem insensitive. Some people have credit card debt for reasons beyond their control, such as medical bills for an extended illness.
But for “Average Joe” — don’t you think we’d all end up with richer lives if we did a better job of doing without?
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I pay my credit card in full every month and I always have. However, I have been guilty of spending more every month when I use my credit card just because I tend to forget what is on there. I have found that if I pay on my credit card every week or two weeks instead of waiting until I get my statement to pay it in full though that I don’t forget and don’t overspend. I have a USAA credit card – I just log in to my account when I pay my bills weekly and send in a payment to USAA for whatever is on there at that time. This way I can still have the convenience of using my credit card for various things but I keep the spending creep under control because I pay it off so quickly.
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Like Rob #2, I also use YNAB and before that the envelope system in Excel. I just recently started using a rewards card after years of staying away from plastic.
Basically, since I know I’m going to be paying the card out of my checking account, and it is coming out of my budget, every time I make a purchase with the credit card, I write it in my checkbook with a symbol next to it. Then when I go to pay the bill, I just add up all the marked entries, double check against the CC statement and pay it.
I’ve been using my checking account card with its credit function for some time, so now I just decide which card to pull out when paying for something I already needed to buy. It has worked so far, so hopefully, I can keep this system up.
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We have been using a rewards card for several years now, and have never had a problem with it. In our minds, it’s the same as our debit cards or cash, since we always pay it in full every month.
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I love that you don’t use credit at the local coffee shop! I wish more people would think this through. I use my credit card at big box stores but keep the cash for local stuff.
My big thing is to pay the bill as soon as I get it. Yes, you can eke out a few more cents of interest (maybe) by waiting until close to the deadline. But what if there is a problem? Paying early means you have plenty of time to check and rectify problems before they become an issue. For example, I once had my electric company auto-charge my credit card each month. They would always wait until the due date to charge my card. When I got a new expiration date with a new card, I forgot to update with the electric company and ended up paying them a $5 late fee because my payment didn’t go through. I was livid and canceled the auto-pay, instead going to their website each month and paying with my card as soon as I got the bill.
I love your guidelines here. I’ve never had a problem with credit, and I’m sure it’s because my mom taught me exactly what you’ve written down here.
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@3 Joseph – you bring up a great point. I fear that “I fully pay my credit card balance every month” is becoming a dangerous mantra. While it is great that you are not carrying a balance – the most deadly sin – you are only getting halfway towards a sound financial plan. If your take home pay is $3,000 per month, and you charge $3,000 per month on your credit card, but then pay the full balance at the end of the month, you have still saved $0. Not falling behind is not the same as getting ahead.
My fear is that people who have worked hard to dig themselves out of debt will treat having a zero month-end balance as the end goal, when budgeting and saving are the real goals.
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It would seem that people who are disciplined enough to track their credit card expenditures and pay in full every month are also the same people who budget and try to save. I used to be one of those who spent impulsively, paid only what I could afford on the credit card and saved nothing. It’s been a slow process but now I track all my c/c purchases in my spreadsheet which puts the daily balance into my budget account so that when I get to the point where I can’t afford to pay the c/c bill, I stop using the credit card. I also save about 20% of what I earn. None of this would have been possible without the use of a budgeting tool (in my case a spreadsheet) and online banking which allows me to check balances every day. It takes under a minute to do and saves me countless dollars in never having late fees, overdrafts, etc. I do agree that using a credit card can make one much more cavalier in their spending, but keeping your eye on the prize (no debt, more savings) helps keep your priorities straight at least most of the time…LOL….
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@ George – I don’t get it. How is this any different than spending the $3000 payday throughout the month with a checks, debit card, or cash. Credit card abuse can make someone go from zero to less than zero, but once you’re to zero/positive, the crutch of not having the freedom to borrow doesn’t help you.
I do agree with you that many people will see being out of debt as the end goal, but cutting up their credit cards will not fix that. Its a lot tougher to protect you from spending your own money if you really want to.
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A zero month-end balance is a pretty good goal. Be honest, a lot of people don’t even manage that. Those that are on top of things pay themselves first – so if they spend the rest of their money, they’ve still met (or worked towards) their goals.
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Responsibility is the key. If you can’t pay it off in full every month, ditch your credit card.
Cards with programs are good if you actually use the benefit they give you (miles, car points, or CASH [the easy one]).
The other benefit of a card is the interest-free using of somebody else’s money for a month (until you PAY IF OFF IN FULL at the end of the cycle).
Last, debit cards are pretty much worthless to me. I don’t have one, I don’t want access to cash via an ATM (I have never used an ATM in my life) and I certainly don’t want ZERO level of protection when buying merchandise by using one (you have a level of protection with a CC, not with a DC). If I need cash, I go to the bank and withdraw it at a window with a real person, not some inanimate object that, if a mistake is made, may cost you some real grief.
-cc
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Well said, J.D.
To avoid credit cards on principle misses the point. Yes, card companies make it exceedingly easy for you to fall into trouble (and pay them money), but ultimately that’s up to you.
If used wisely, credit cards (and debt in general) can be a powerful tool for earning money in the long run. Of course, managing money responsibly is easier said than done. I’ve also written posts to help people exercise discipline with debt. I hope you check them out, and I appreciate any feedback you might have.
10 Questions Before You Choose A Credit Card: http://theskinnyon.typepad.com/the-skinny-on/2010/08/10-question-before-you-choose-a-credit-card.html
15 Most Important Lessons For Avoiding Credit Card Debt:
http://theskinnyon.typepad.com/the-skinny-on/2010/07/the-15-most-important-lessons-for-avoiding-credit-card-debt.html
Thanks again, J.D. I continue to look to your blog for top quality financial advice.
Take care
Jim Randel
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Can we just end this by agreeing the person that can’t responsibly use a credit card is not responsible enough to heed advice to not get one?
And how in the world does not having a credit card going to make one save responsibly? (@ George, you don’t need a credit card to spend all of your money, most people were capable of spending they’re entire paycheck for many years before credit cards were popular).
I can do lot more damage with my debit card/checks than my credit card. It aggravates me I see Suze/Dave/etc telling people with $200K net worths they can spend $30K on a boat and then bash someone with twice as much and a $5K credit card balance. Our people getting crushed for carrying a 10K credit card balance at an introductory 0-2% and while those paying 5% for a $500K mortgage are told not to pay it off. People are appluded for using coupons to save 20cents to buy crap they likely don’t need and the $250 rewards checks are dismissed as dangerous tempatations to spend.
Maybe not feeding the predators is something I should consider, but that does in my Visa check card as well.
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A little off topic, but still credit card related. I have two credit cards that are paid off and no longer in use (1 to go and I am done with credit cards forever!). Does it hurt my credit score to close them?- or keep them open. Not sure what to do with them now; I never plan on using them again.
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If you are paying off your credit card every month, what is the benefit of a credit card over a debit card? Just the fact that the CC company carries the risk for a month? Just curious.
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If you are paying off your credit card every month, what is the benefit of a credit card over a debit card? Just the fact that the CC company carries the risk for a month? Just curious.
Rewards programs that give you a couple percent back on what you spend.
I like having a real time updating of how much money I spend (as I do with my debit card purchases) without having to track it myself. I figure I essentially pay 1-2% for that convenience, and I’m okay with that.
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@18 Steve – I agree that a zero month end balance is a good goal – at a certain point in a person’s financial development. For someone who has just dug themselves out of debt, achieving a zero balance lifestyle is a big victory. But to focus on the zero credit card balance is to direct attention away from your budget – it is easy to congratulate yourself for not carrying a balance, but then not save a penny at the end of the day.
Paying off your balance every month is essential to good financial management; good financial management is much more than paying off your balance every month. That is why I get concerned when having a zero balance is presented as evidence of responsible credit card spending.
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I agree with Janice, above. Those of us who are responsible with credit are also more likely to have savings goals and pay ourselves first, anyway.
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It’s been asked if you pay your card each month (or even with each transaction) why not just put it on a debit card.
Answer: everything I buy and put on my Amex card has a guarantee, and items that already have a guarantee get automatically doubled by Amex as part of the cardholder agreement. Plus I get Air Miles with my Amex. There are clear benefits to paying with a credit card, if you are responsible with its use.
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I’m still in the process of getting out of credit card debt and yet I do the above as well.
First thing I did was pay off the entire balance on the card that offered the best rewards. (It was also the one with the highest interest rate; figures.)
This card became my “operations” card. Pretty much every purchase I make goes through this card. I track everything religiously and pay off the entire balance every month from the amounts I have in my budget for fixed and variable expenses.
The other cards are not even in my wallet and are never used. What’s in my budget for debt repayment goes to them according to the debt snowball strategy.
This might be living dangerously for someone with poor impulse control (like me!), but I’ve been doing it for over a year now and it’s working out great. I have enough travel miles saved up for a trip to Europe! (I’d love to have a cash-back rewards card, but I haven’t found one in Canada whose cash-back rate was anything but anemic. Please reply if you know of a good one.)
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wow I can’t believe someone actually asked how to use a credit card responsibly, I just thought that everyone knew what that meant. Again, I don’t think that banks, lenders, businesses are evil when they give people credit cards.
No one forces people to use credit cards. Its people that get themselves into debt through their actions, however I think it doesn’t help when credit cards play little games. Capital One used to change my due date for payment without telling me, so now I login at least twice each week to see where I’m at.
Also instead of waiting for the end of the month, I like to send them a payment around each friday for what I charged that week.
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it’s not worth it to learn five *essential* new skills and four new behaviors in exchange for 1-2% cash back on purchases. The return on investment is far too small. I’ll keep living without credit cards.
I bought a surfboard the other day. The total bill came to $930. I paid with a check because the surf shop didn’t want to pay the 2% transaction fee that comes with a debit card. They’re a little shop run by two guys, of whom one has been building surfboards by hand in the back of that building for 50 years now. I know they already operate on thin margins, no need to cost them an extra $19 just so I don’t have to fill out a check.
That’s really not why I don’t have credit cards, though. I paid with a check as a favor to a local business, but I don’t use credit cards because I find they’re more trouble than they’re worth. I’ll manage to get by without frequent flyer miles and extended warranties.
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@Jim (#21)
I didn’t know you had a blog! For those who don’t know, Jim Randel is the author of the “Skinny On” books, which I like. A lot. In fact, I need to do a general review of the entire series. They’re great intros to various financial topics. They use stick figure comics to explain complex subjects. It works better than you might think.
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@#1 Jess, who said “I don’t know if you are allowed to do this in the US but here in the UK we can… ask them to set up a direct debit for the full balance of the statement, every month on the due date.”
I don’t trust my credit card companies enough to give them direct access to my bank account. I’ve heard horror stories about disagreements between the CC companies and their customers, where large sums have been cleaned out because of charge on the credit card that wasn’t the customer’s responsibility. Good luck getting that money back.
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I think Skinny Jim makes a good point and the theme is once you use them, how to use them wisely. I say the top tips – once you’ve decided to use them would have to include making sure you have a budget or treat the card as a debit (I often pay off the charge from my checking account before I get the bill – I don’t care about the “float”).
But I also don’t think that anyone’s made a significant amount of money on points or other rewards. It can be a nice way for a small “bonus” for being a “good credit card citizen” though.
I’ll definitely check out Skinny Jim’s posts though – always looking for more tips!
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In answer to J.D.’s original question, I like my Capital One card better than my Citicard. The reason – when it comes to international purchases, there is no transaction fee for converting from the host currency back to dollars. Citicard charges about 3% or so for the process, which gets expensive if one travels for prolonged periods overseas.
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By the way, @Jim (#21), I hope it’s ok that I called you “Skinny Jim” – it was a play on your name and the title of your books, obviously. I figured it wasn’t offensive to you.
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I think it’s great if you can pay off your credit card balance at the end of the month, but I kinda think that’s defeating the purpose of the card. The function is to give folks the ability to buy goods or services and space out the payments. Trouble ensues when people use it in an irresponsible manner.
I recently finished paying off my one credit card and I’m glad that I did. However, sensible use of a credit card has enabled me (and, I’m sure, lots of people) to stagger out the cost of a major expense.
Yes, being debt free is a worthy goal. Yes, having savings is a worthy goal. Credit, wisely used, is a valuable tool. For a major purchase, ideally I pay cash and if I can’t, then I either do without or pay over a max of 3 months. Works for me. I am aware of the costs involved.
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Of course, valid points.
Each persons financial situation is unique so is how they will utilize their credit cards.
Credit card debt reeks havoc on many lives, so as a general rule (for me) I will steer clear.
Once I’m in a more controlling position of my finances, I might debate these issues for myself. I, like you, will be setting ground rules.
Still, statistically speaking, it’s been proven you spend more when using plastic…period.
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Kate wrote:
I think it’s great if you can pay off your credit card balance at the end of the month, but I kinda think that’s defeating the purpose of the card. The function is to give folks the ability to buy goods or services and space out the payments.
If you are looking for credit, a credit card is the WORST possible form! My current credit card interest rate is stuck at 19.99%. I have a line of credit which is set at 6.77%. If I need to finance something urgently, I would always choose the line of credit.
And in case someone answers “but what if I don’t qualify for a line of credit?”, then the obvious answer is “then you should save up and buy your items with cash, because if your own bank won’t give you a line of credit, you shouldn’t have one!”
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Re: #38
“Still, statistically speaking, it’s been proven you spend more when using plastic…period.”
This is incorrect.
MANY people spend more when they use plastic. I do not. I spend based upon my YNAB budget. I spend based upon my budgeted categories, not my credit limit or bank balance.
Statistically speaking…I wonder how many of the experiments that studied spending habits included people who use a budget religiously. The studies that I have read make no mention of budgets. If using a budget was the case, I would think think that using plastic would have made no difference.
Although I have not seen it directly mentioned in these comments, I wish people would stop quoting the fictitious Dunn & Bradstreet study that many people quote. Dunn & Bradstreet has no record of any such study being done. Thanks JD
http://www.getrichslowly.org/blog/2010/04/27/money-myths-and-the-importance-of-thinking-for-yourself/
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“and suddenly you’re finding out, the facts of life are all about you…you-oo-oo”
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I wish people would stop quoting the fictitious Dunn & Bradstreet study that many people quote. Dunn & Bradstreet has no record of any such study being done.
http://www.getrichslowly.org/blog/2010/04/27/money-myths-and-the-importance-of-thinking-for-yourself/
efk22, thanks for finding the link – I was searching for that myself.
I also found that my urge to splurge with credit went away once I had a firm budget and knew exactly how much discretionary money I had each month. Suddenly I knew how much it would take away from other things, and it made it more real to me.
Then there’s marriage. In my marriage, we have a common pot and common credit cards, so all credit purchases are recorded. We do have a certain amount of “mad” money … which makes me more likely to make what I regard as more-frivolous purchases with nice, untraceable cash.
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@ Lonnie #23 – you should just keep them open if you are sure you won’t use them. It will help your credit score to stay higher. But if you really are never going to use them you can close them, it will just ding your score for a while. If you aren’t going to open any new credit for a while it shouldn’t matter.
Check out J.D.s book for more details – I’m about halfway through.
@ Jeremy #24 – debit cards are more dangerous because the money is coming directly out of your bank account. If the card gets stolen and someone charges the card for a high amount it could take you a few weeks to get the money back. In the meantime, you’re out of luck and your cash is gone.
Credit cards on the other hand will usually reverse the charge almost immediately. They also provide other additional protection, especially when you buy high ticket items like electronics.
See more here from Ramit Sethi:
http://www.iwillteachyoutoberich.com/credit-card-perks/
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I’ve always taken advantage of credit cards to the ultimate degree! Not doing so is giving up free money with respect to the reward credit cards!
You identified the key point to be on the lookout for when choosing the best card! Nice Job!
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I like the chainsaw reference. Mr. BFS and I love using our rewards credit cards since cash seems to disappear around us but credit card purchases stare us down all month. Plus, the 1-5% cash back is pretty great for stuff we were going to buy anyway (like the 2% back we get on groceries).
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Monica said it best:
1. Use credit card for purchases
2. Receive monthly bill
3. Pay bill in full
4. Repeat
Using credit cards this way keeps you out of debt, gives you the buyers protection they offer and if its a rewards card bonus!
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These are good credit usage tips. But the first step is setting up a budget. I use Quickbooks and analyze my spending, then use an excel sheet to layout all of my costs; necessities (including a savings category) and frivolous items. I go back and forth and tweak my budget every so often to make sure I’m meeting my goals. (I’m probably over-analyzing, but I’m still working my way out of debt!)
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I have always paid off my credit cards in full every month, which allowed me to build a good credit score without throwing any money away on interest. Plus, I have earned hundreds of dollars in rewards just for making purchases I would have made with or without a credit card.
I think there are two ways people can look at credit cards. For those who use credit cards responsibly, credit cards are simply another method of payment. I’ve always considered them kind of like paying by check, because the money doesn’t come out of my bank account right away, but once I make the purchase, the money is spoken for, so I subtract it from my available funds. That’s why I use a budget spreadsheet to track my expenses instead of just looking at my bank account balance.
Those who get in trouble with credit cards sometimes seem to view available credit like cash that they can (and should) spend. If they have a $5000 credit limit, they consider it the same as having $5000 in cash, even if they don’t have that much actual money in the bank. I think this is why some people have difficulty with such a simple concept as always paying off credit cards in full.
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I always enjoy the topics here at GRS. But this has been a particularly Saved-By-The-Bell type of day…
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You can get the Schwab Invest First credit card which pays 2% back on all purchases, and has no foreign transaction fees. I’ve had it for about 2 years now and it has been awesome – I especially loved paying my wedding vendors on this card and recouping 2% of the cost!
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