It’s a bit difficult to talk about credit cards in general terms, since there are SO MANY different kinds on offer, especially in the U.S. (in other countries like Canada, it’s a lot more simple and straightforward).
But a major question that many people may have is just how to use their credit card and what to use it for. It sounds simple enough – what’s there to understand? But if you’re serious about getting out of debt and improving your networth and cashflow, you have to control your credit card use.
In an ideal world, you would charge items to your VISA, rack up the points or cashback or whatever other reward program, build your credit, and then pay it off in full each month. Check! We got it. Easier said than done, of course.
Let’s face it, if you had the cash to begin with, you would probably have bought the thing using cash.
Here are some common credit card pitfalls
Do you see yourself in here anywhere?
(1) This is such a small purchase and I’m having such a great time! I’ll put it on the card and pay it off later when I get home. -Small things add up and also accrue interest. Small things is your way of letting purchases slip under your conscience radar. Be especially vigilant about these “small purchases.” If it’s so small, why don’t you have the cash for it? If you don’t have the cash for something that small, why wouldn’t you go to the ATM and get it out? Never use a credit card just because you’re lazy or you don’t want to think about spending three dollars. Solution: if you’re really attached to the convenience of your credit card, transfer some money onto it AHEAD of your shopping trip, so that it’s already “paid for” by the time you use it. Otherwise you need to find a way to discipline yourself to truly transfer the money back onto it by the time you get home.
(2) I really need this item/trip/service right now, and there’s no way I could have foreseen it coming, so I need to charge it. It’s not my fault. -Out of town job interview? Extra supplies you need for a course? Pet is sick? Whatever it may be, these are all kinds of things you either COULDN’T or DIDN’T plan for. If you’re using your credit card in this way, it means you need to develop some more savings ahead of time. It’s either PAY AHEAD of time or PAY LATER and PAY MORE because you didn’t plan. Solution: you need a contingencies emergency fund for this purpose. Store up savings for the things you KNOW happen at irregular intervals. Have another emergency savings account for the things you DON’T KNOW about, let alone when they will happen. Because you will still need money for them.
(3) Oh, wow, that is such a great _______. Just think of how much fun/how interesting it would be to ______ if I had that. It would fit right in with my _____. I could _______. I’m feeling better already just thinking about it. I know I can’t really afford it but my life would just be so much better right now if I had it. – Uh-oh, you’ve been suckered. This is something you didn’t plan for, didn’t budget for, you already can’t afford it, and you’re instantly making rationalizations about how you’ll be able to pay it back…. later. How did this happen? Were you browsing online when you were supposed to be working? Were you strolling through the mall with a friend when you really knew there was nothing you needed to buy? Solution: stay away from shopping centres and online stores and promotions if there’s nothing you need to buy right now. Keep a list of what exactly you need. If it’s not on the list, trust me, you don’t need it. This should be a simple one to fix. Don’t let your brain stray away on you and drag you over like a kid to the candy rack.
Probably, each of these overlap with one another some of the time. But what they have in common is that they are all decisions based on a lack of awareness and planning. A good thing to do is to start paying attention to what you’re telling yourself each time you use your credit card. Ask, what am I putting it on the card for? Why am I not using my debit card?
The Only Things You Should Use Your Credit Card For
Like I said, you might have other uses to add, especially if your card has a really good rewards program. Personally, I’d rather not get involved with those in the first place. Here’s what I think should be the best use of credit. I’d welcome your suggestions in case there’s anything I’ve forgot.
(1) When something can only be bought and paid for online. Enough said. Sometimes there is simply no other way to make the purchase, with more businesses being online-only these days. In this case, write the purchase down and transfer the cash onto your card to pay for asap.
(2) As a specific form of record-keeping. This will only apply to some people. But there may be budgetary reasons that you’d like to keep certain kinds of purchases all on a single card in order to better keep track of them. If you’re doing this, then you probably already have your finances well under control that you have the discipline to properly take care of paying your card off in full right away.
(3) While traveling. ATM cards these days with the “PLUS” or “CIRRUS” symbol are supposedly accepted everywhere, but in case you can’t find one, a credit card may help. NOTE: the opposite may be equally true. When I traveled in Europe, for example, there were many places that didn’t take any credit cards at all.
(4) While traveling, for true emergency purposes. In this case, it’s acceptable to not pay it off right away or at least until you get back home and on your feet. Who knows what the emergency would be. Perhaps you missed a flight or lost your bags or your car was stolen.
(5) In order to insure your purchase or take advantage of certain “rewards” points. I hesitate to include this one, because it is subject to so many of the pitfalls I noted above. Since I don’t use my credit cards in this way, it’s hard for me to make the case for it, but I know people who do. Suffice to say that here too you need to be extremely disciplined and pay the card off right away.
(6) To avoid ATM and bank debit fees. This is a pretty good reason which also requires extreme discipline. Many stores charge you to use your debit card, and your bank and the host bank will also charge you if you’re using your card at an ATM (unless you’re on a special plan). If you always use your credit card, you can get around this, but you have to make sure you pay it all off right away by phone or online. The rewards are there, though, if it means you can save $10-$15/month in fees.
Have I left anything out? Do you agree/disagree? The importance of all this is that it’s not enough to just pay down your debt; you need to KEEP IT DOWN. To do that you need a plan. You can’t keep yo-yo dieting on your credit card forever. I hope this helps some of you think about it! Let me know.
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{ 11 comments }
I’m a #5, my only current use for credit cards is the great rewards points that you get, even when you pay in full each month. It is an amazing deal if you can stay focused and PAY OFF EACH MONTH, AMEN!
I am the same as The Almost Millionaire. I pay off all of my credit cards every month, and also put money into savings. But, I’ve recently been told that it helps to keep a low balance on some cards to improve my credit. Is this true?
Good advice, but there are a whole bunch of families out there where both parents have lost their jobs. Contingency funds run out pretty quickly when they are being used to pay the rent, and you’re not going to let your kids go hungry if you’ve got a credit card that still works.
Zack, very good point, of course… I was still assuming “under normal conditions” but these are not normal times… that said it does speak to the efficacy of emergency savings — at least maybe it could provide some little buffer before one does have to dip into the very expensive credit.
My view is that credit should never be used.
Currently, laws prevent money being a factor in medical treatment and that debt has no interest when done through the hospital rather than a card. If you gotta go to the doc, you gotta go; but don’t put it on your card.
Sure if you have a card and hungry kids…my argument probably goes out the window for many. But… I would suggest turning to neighbors and learn about gathering wild food in your area rather than submit to the slavery imposed by debt. Debt will not free up assets for food next month…just the opposite.
Debt is servitude. With current debt laws, it is likely lifetime servitude.
There are no advantages to debt that are not outweighed by their consequences. Never use a credit card.
Erik,
Great for you if you can avoid them altogether. After all, it’s not credit cards themselves but the fact that they are DEBT (not credit, actually, ha ha…) that makes them dangerous.
Megan,
I’m not an expert on what will actually boost your credit score. I’ve heard both sides arguing for lower or higher ratios of debt load to debt limit. I think that the more often you can pay it off within the same month, the better. Never max it. Never miss a minimum payment. Those are more important than the exact ratio, I think.
I did work at a credit ratings firm once, and trust me it is the missing of minimum payments that will most adversely affect your score.
@Erik – using credit for consumption is generally foolish – although, again, avoiding homelessness is key to becoming re-employed when unemployed – but smart use of credit is just as key for success in business. In fact, I would go so far as to say that without the smart use of credit in business, you will be wiped out by any competition that does use it. Credit is a tool. It can be used wisely or foolishly, but with proper training or good professional advice, it need not be feared.
Great post! Pherhaps you should go on CNN and teach America how to deal with their credit crisis, professor. lol :)
#6 reason to use credit cards:
I am not a loser and use it instead of cash because it is easier. I could never conceive of a day when I couldn’t pay the full amount at the end of the month, and if I got to that point, I wouldn’t use credit cards.
Ditto John S. I am as anti-debt as you will find but I’m a heavy card user paid off in full every month. The key point is whether you are using a card to cover something you cannot afford or if it is simply a tool to facilitate daily transactions.
BTW – don’t take the highest limits the card company will give you. Locally they restrict card limits to 2x monthly salary which seems like a lot of rope to give someone.
I’ve never racked up more than 1 weeks worth of salary on a card and have reduced my limit accordingly for security purposes. Yet even these days, the banks are are constantly pushing higher limits or the next tier… gold, black, platinum, whatever. If you really need to make a substantial purchase, there are better ways to finance yourself not to mention saving for it.
You need to be so so careful before using your credit card for a purchase. Even if you start with good intentions it can be very easy to get yourself into more and more debt.
Interesting read though, thanks.
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