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.

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