Credit cards have long been heralded as the Lord Voldemort of the personal finance community. They seem to be often viewed as one of the worst things you can do when it comes to financial stability and integrity.
In fact, one of the first steps in Dave Ramsey’s get out of debt snowball plan is to get rid of your credit cards and focus on a cash-only lifestyle.
Simply put, Americans can’t be trusted to use credit cards responsibly. According to Ramsey, responsible use of a credit card simply doesn’t exist.
While I don’t agree with him, there are a lot of mistakes that can happen when using credit cards. The number one mistake is that you can rack up loads of debt and then can’t pay it off.
Oftentimes people sign up for cards with super high interest rates that lead to financial disasters later on. Or there are cases where the terms of the card aren’t fully understood before signing, and you find yourself in a credit card enigma.
Perhaps you were enticed by a 0% introductory interest rate only to learn that if you didn’t pay off the balance in full by the time the rate expired, you were retroactively charged interest. Ouch.
But despite all the warning of credit card usage, there are actually lots of benefits to credit cards. The secret is in learning how to use credit cards the right way, and not abusing the power of the plastic.
The Very First Rule of Using Credit Cards
The very first rule in using credit cards is that you must be financially responsible. If you’re still digging yourself out of loads of consumer debt, chances are you’re not going to have the financial savvy to start using credit cards to your advantage.
Notice I said consumer debt.
There are many instances in which people have come into a bad financial situation through no fault of their own, whether it be an illness, a job loss, or even student loan debt. Sometimes we are forced into debt, but that doesn’t automatically mean you’re irresponsible.
Most people know enough about themselves to know if they are financially responsible. And surprisingly, almost 45% of Americans have credit scores above 750. So this hoopla about how we’re all financially doomed and irresponsible? It’s baloney.
If you can be financially responsible with your money, meaning not spending any more than the money you bring in and have a sizeable emergency fund saved for a rainy day, and are contributing to your retirement, chances are you’re going to be absolutely fine carrying around a credit card in your wallet.
How Credit Cards can Help You
While there has been a lot of talk in the media and blogs about the negative aspects of credit cards, credit cards can also be a beneficial tool if you use them the right way.
Establish Credit History
Credit cards are especially helpful in establishing your credit.
When my husband and I began to share finances, my credit score was substantially higher than his. While your payment history is a big factor in determining your credit score, the length of your credit history can account for up to 15% toward determining your credit score. Other factors include amounts owed, new credit, and the types of credit used.
My mother had actually opened my first credit card at age 14 with a $500 limit. This started my credit history and helped to teach me good credit card use principles. My husband, on the other hand, didn’t get a credit card until much later, so his credit history wasn’t as long as mine, and thus negatively impacted his credit card score.
Opening a credit card is usually one of the easiest ways to get started in establishing your credit history.
Raise Your Credit Score
In addition to establishing and creating a lengthy credit history, credit cards can also help you raise your credit score simply because you have credit. There are plenty of ways to establish credit, but credit cards tend to be the easiest way to get started.
Most people will need credit to make major purchases like a home or a car. By starting with a small amount of credit like a credit card, you’re showing creditors that you can be financially responsible with handling credit and can pay your debt.
If a creditor doesn’t know anything about how reliable you are, chances are you’ll get hit with an extremely high interest rate whenever you do need to use credit.
If you’re fearful of using credit cards, the trick is to learn the right way to use them so you don’t find yourself in financial ruin.
If you’re not sure what your credit score is, you can check it for free here.
The Proper Way to Use Credit Cards
The right way to use credit cards—and the only way I encourage you to use cards—is to pay off your total in full every month. Never carry a balance.
It’s that simple.
In fact, I encourage you to pay off your balance in full every day, that way you never fall behind by finding that you’ve spent more on your card than you have available at your bank. I actually pay my balance every few days for this very reason.
I never want to find myself in a situation where I’ve spent more than what I have available in the bank. At this point, I charge all our daily expenses on a credit card and rarely use cash or debit.
However, almost as soon as I make the purchase—or at least within the next few days— I transfer the payment from our checking account to our credit card.
I have gone years with using my credit cards and have not paid a dime toward interest.
If I haven’t paid a dime toward interest, what benefit am I getting from using credit cards?
Well, in addition to the benefits I mentioned above, there are other benefits of credit cards, such as credit card rewards.
The Benefits of Credit Cards
Being responsible with credit card usage has allowed me to rake in the benefits of credit card rewards. By having an excellent credit score thanks to my lengthy credit history and perfect payment history, I’ve saved thousands by using credit card rewards programs to pay for vacations.
In addition, I haven’t paid interest on these cards, so essentially it’s free money to use simply because you use the card.
I only recommend signing up for credit card rewards if you’ve already proven to yourself that you can be financially responsible with credit cards. Too often, people get mesmerized by the rewards and overspend simply to get the rewards.
This is dangerous territory that you shouldn’t even stick your feet into unless you can absolutely trust yourself to carry around plastic responsibly.
Credit card companies often offer hefty sign up bonuses just for signing up for their credit card. The trick is to read the fine print and understand all the terms and conditions before you agree to anything.
Many of these cards have annual fees. Annual fees?!
Why would I pay a credit card company to let me borrow credit? I’m not letting them take advantage of me.
Most annual fees are waived for the first year, so I take advantage by signing up for the sign-up bonus offer, and then cancel the card before the introductory year ends. It’s perfectly legal and can really help the middle-class consumer save enough points for special occasions.
My husband and I actually recently saved over $1,000 on our Mexican vacation to Playa del Carmen and Tulum by using credit card rewards through various programs.
We were able to cover the full cost of our airfare and also pay for a portion of our hotels thanks to reward points.
This goes to show you that there are positive ways to use credit cards, but only if you can handle the responsibility.
The One Thing You Need to Know About Using Credit Cards
Credit cards can teach you discipline and financial responsibility. It takes a mature individual to carry around a plastic card in their wallet that is worth thousands of dollars and not use it.
As a society, we need to learn the concept of delayed gratification. We can’t have what we want all the time exactly when we want it. Credit cards are a very powerful tool when used correctly, but they can also be abused very easily.
Think of it like chocolate. A lot of people really like chocolate, right? That doesn’t mean you eat it at every meal, though, as we all know it’s not healthy to do so.
Does that mean you have to go a lifetime without eating chocolate? Nonsense! We just need to learn how to manage it responsibly and indulge in moderation.
The same is true of how to use credit cards.
The solution to using something that can be dangerous is not to completely eradicate it from your life, but to teach yourself discipline and equip yourself with the right tools to use it correctly.
Do you use credit cards? How do you use them responsibly?