Credit cards. Are they good? Are they bad? In all honesty, I think they do more harm than good for a large chunk of the population. That said, I do see the benefits of having a credit card (we have several) provided you follow some basic rules. A big reason for this is not having some clear rules on using a credit card. With the right rules it can be ok and you can use a credit card wisely.
By following these rules you can avoid the common mistakes that most of us make with credit cards and end up damaging our financial health. Lots of us get into trouble with credit cards because we don’t know the rules.
Before we dive in… Too many people get credit cards with huge lines of credit and then proceed to spend like there is no tomorrow. If you are in this camp, you shouldn’t have a credit card. It’s hurting you more than it’s helping you.
Make Sure You Are Getting A Reward For Using Your Credit Card
The first thing to consider is if you are getting a credit card is that you should get something back for using it.
Companies pay big bucks to get you using their cards. If you are going to put something down on credit make sure you are getting points or cash back of some kind. Whether it’s cash back, travel rewards, car rewards, make sure it’s actually a reward you will use.
Be wise, don’t spend to get more rewards, that’s a fools errand.
Only Use Credit When It’s Not Needed
There is an advantage to having a credit card that gives you rewards. For those purchases that you were already going to make using a credit card can be a nice way to get some type of bonus.
If you have done this in the past, it’s ok. Make a vow from here on out to start using a credit card wisely.
A good rule of thumb is to only use a credit card when it’s not needed (meaning you could use easily pay for it with cash). That way you know you have the money available and when you use it you feel like you are being smart with your spending.
A good question to ask yourself before you use your card is: “Can I pay this off immediately?”
If the answer is yes then it’s ok to use it.
Only Buy What You Can Afford Today
This is pretty simple and straightforward. It’s the advice my dear old dad gave me when I got my first credit card before taking off to Europe when I was 18.
He told me “Son, only use it when you need it. Always pay it off. Never carry a balance. Because if you do, you will wreck your life for years to come.”
This advice has stuck in my head since then. To this day I still use a credit card like it was a debit card, and I’ve never carried a balance. Thanks Dad!
Never Carry a Balance
This one is pretty obvious (but wasn’t when I was 18, thanks again dad!). If you are carrying a credit card balance it’s a sure way to start drowning in debt.
If you are carrying a balance, one of two things has happened.
1) You got carried away with your spending. At this point, cut up your card and get back to proper money habits.
2) Some unforeseen even has happened. In that case find a way to pay it off and get rid of the card.
Minimum Payments Are NOT OK
Did you know if you only make minimum payments you will be paying back your cards for decades?!!!
Take a look at my last statement.
I had a $525.49 balance. My minimum payment was $10.
The fine print says that if I were to only make minimum payments it would take 8 years and 2 months to pay it off.
That’s a lot of wasted money.
Pay it off in full every month.
If you can’t do that, then don’t use a credit card.
Check the Rate
If you are going to need a balance, or carry a balance, I will tell you right away. DON’T GET A CREDIT CARD. The interest you will pay is absurd. Many have low rates. But those rates are actually only low compared to the 19% to 22% that the other cards charge.
If you need money look into a line of credit or another low interest loan. A credit card is not your solution.
Don’t Have a Huge Limit Amount on Your Credit Card
Here’s the thing. Banks want you to have as big of a limit as possible. They know that if it’s there, it’s a pretty good chance that you are going to use it. Or at least more likely to use it. This will get you into trouble. Stay strong and keep a lower limit. The only way around this would be if you have had cards your whole life and never carried a balance and consider yourself to be a smart spender.
This one I’m actually guilty of. We use a premium cash back rewards card. We pay around $100 a year for the privilege and in return we get 4% back on Gas and Groceries. 2% back on recurring payments and 1% back on everything else. But by paying this extra amount it translates into another $200 of cash back, which makes it worth it.
If you have a card that requires an annual fee make sure it’s worth it.
Always Remember Cash is Still King
While getting a credit card can be desirable it’s worth noting that cash is king. If you can’t handle the responsibility of a credit card, then don’t get one. That should be rule number 1 when thinking of getting a credit card. If you can’t keep yourself from spending, then don’t give yourself the temptation. Pure and simple.
Let’s Recap The Rules For Using a Credit Card Wisely
If you are going to use a credit card, make sure you get some type of benefit from it.
Only use a credit card for purchases that you can pay off right away.
Always pay it off full every month. (aka Never Carry a Balance).
Don’t have too large of a limit.
If you are carrying a balance make sure you have a low rate.
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