Friday, July 08, 2005

Rule #1: Credit card use

  • Use a credit card for every expense you can possibly charge.
  • Use a card that gives you frequent flyer miles or some other benefit that you'll actually take advantage of.
  • Only charge as much as you can pay off in full every month-- don't carry a balance.

I know this is controversial-- a lot of people caution against credit card use, saying that it's easy to go crazy spending money without seeing how it affects your bank balance. They'd rather use cash or debit cards, thinking this will keep them in control better, and for some people, that may be the right way to go. But if you can keep your expenses in perspective and not spend more than you can pay off, here's why it's a good idea:
-- you are basically getting a free short term loan for a few weeks, as no finance charges are due if you pay your bill in full every month.
-- you get a printed record of exactly what you spent your money on, monthly and usually a summary at the end of the year. It's harder to keep track of cash. Knowing what you spend your money on is the first step to being able to see where you can save.
-- if you use Quicken or another financial tracking program, you can set up online access and download your transactions right into the program.
-- if the card has a good rewards program, you can save a lot of money. I use a United Airlines Visa, and between credit card use and actual flights, I've earned enough miles for an average of one international round trip for each of the past 5 years. Some of this was based on business use reimbursed by my company, but that's at least $3000 or so that I've saved on airfare. My card has a $50 annual fee but it pays for itself!

Obviously, if you can't pay off the card every month, you should avoid using it, and if you have a credit card balance, you should do everything you can to pay it off, before the high interest buries you! When I was in my early 20s, I ran up a balance and switched cards a few times to take advantage of those "no interest on transferred balances for the first 3 months" kind of offers. But as soon as I had any cash, I tried to pay off the cards. I have known people who had built up some savings, and still carried large credit card debts. "But my savings are earning interest!" they'd say. It makes sense to keep some savings for emergencies, but you're probably paying 10 times more in interest on the credit card balance than your savings is earning, so just pay off as much as you can.

53 comments:

Jose Anes said...

Very similar strategy discussed on my posting:
Money and Investing: Credit Card Management

Anonymous said...

Our local supermarket lets Discover card users charge up to $50.00 over a purchase which is returned as cash. I probably make about two purchases a week and get about $100.00 in cash.

The reason why I do this?

1) This lets me keep money in my checking account in which I get about %1.5 a year.

2) This builds my balance towards the Discover card cash back rewards.

isserializable said...

learnt it from my own experience. Credit Cards kill you! Never ever..

dusty said...

This is TOTALLY how I do it! But you are 100% correct in that you have to have a good view of your finances and just how much you can charge per month before it gets too much. I've gotten pretty good at it and earn a nice little Cash Back bonus yearly!

debt monster said...

Credit Cards are stupid!!! Don't use them! Mess with the snake and you'll get bit!

1mil said...

I'd love to try this rule out if I could actually GET a credit card!

LOL


1mil

Anonymous said...

it's a good way to build up your credit also, don't forget! Just control yourself and you'll be fine. I made mistakes with credit when I was younger too.

Debra said...

I've lived this way for years! Means we have to know what's coming in and what's going out. And I earn double miles at the grocery store and several other merchants when I use my card.

Though it is true... you need maturity and discipline to do this. Without those things, this could be a disaster.

domicile said...

My mom, who is very cautious with her money, used to always go the bank to pay off her credit card purchases right after making them, often on the way home if not simply later that week. She never ever carried a cc balance. I adopted that habit when I first got my own card, but I'm sorry to say that over time I've gotten more lax with it. For the first time ever I've found myself not paying down my balance for the last year which is very unusual and kind of frightening for me, even though it isn't a crazy big balance and I have a plan to pay it off. I also bought my first house this past year, so I kind of let myself off the hook for that.

Anonymous said...

Until I started reading blogs recently, I never thought of credit cards as anything other than a different form of payment.

Each time I use it, it's not a loan, it's a purchase. The balance has to be paid in full each month. I have never imagined doing otherwise.

The phrase "get in trouble" with credit cards never made sense to me, until recently. But now, I have been enlightened by the posts of internet denizens and think I understand: Most people in credit card trouble have been viewing the credit card as an entirely different item - a source for a loan.

...AND, the loans they've been taking out have been at obnoxious credit card rates

"Get bit" one poster above said? Only if you're trying to get something out the card that you didn't have to begin with.

If you wouldn't write a check for more than you have in your account, why would anyone knowingly pay with a credit card for more than that amount? There's no other way to "get bit", right? (Am I missing something?)

I've been on the phone with credit card CR's who start talking about their low rates. I immediately cut them off and tell them not to waste their time, they could make my rate 300% APR and I wouldn't care because they'll never see a dime of it because I'd never let a balance go to the next month. (I then try to steer the conversation to a higher credit limit instead.)

I'm honestly not trying to be a snot, I'm just trying to point out the very different philosophy behind the two types of posts I see. I think the logic behind the CARDS-ARE-EVIL school of thought is flawed. I think you really mean HIGH-INTEREST-LOANS-ARE-EVIL, and to that I would agree with you. But using a card where you'd otherwise spend cash or pay by check has many advantages, as our original poster has described.

Anonymous said...

My bank card has all the avantages you listed above for credit cards, including a good rewards program. Best of all I don't have to worry about the possiblity of carrying a balance between months and netting those daily interest rates.

Christopher said...

This is right on point...

My wife & I do the exact same thing. I have a CITI Platinum Card that pays a 5% rebate on gas station & supermarket purchases & 1% on every other purchase. I charge every expense we have like cable, trash, gas food, utilities, etc to this card & pay off the balance every month. Not only does it save time, we max out the rebate limit of $300 by August or so. After that I switch to my wife's Discover that has the same benefits & continue collecting free cash. This year we will earn $500+ in credit card rebates-not bad!

Anonymous said...

The cash back reward you can earn from credit cards depends on your particular spending profile -- especially how much you spend in various categories (e.g. gas, grocery, restaurants, utilities, etc.)

The calculator tool at www.creditcardtuneup.com makes choosing the best cash back card (or mix of cards) easy. Given your spending pattern, it calculates your expected annual rewards for each of the leading cash back credit cards and even for your best mix of cards. See the tool at http://www.creditcardtuneup.com/ .

rpmsol said...

These guys have the Lowest Fee Debit Cards in the Industry.

http://debit-card-blog.info/page/2/

AS 2 Enterprises, LLC does business marketing various stored value card products, among them the Exclusive One Card, and the Exclusive One VISA (the “Debit Cards”). We have established ourselves as a provider of financial service solutions for the unbankable consumer demographic, and extend our services to all unbankable people, enabling participants to efficiently buy and sell products at point-of-sale or over the Internet, and participate in the buying power that is commanded by VISA, all without credit checks or a bank account.

Our program grants participants certain advantages over the traditional cash-based system. First, the Card is prepaid and loaded at one of any participating locations, via direct deposit, card to card transfer, or web interface. The Card eliminates the need for the unruly carrying of cash, and provides participants with the opportunity to upgrade the ATM debit card to a VISA product, thereby commanding the purchasing power that comes with owning a VISA card.

HalMd said...

Every time I get a $100 check from my Chase Cash Rewards card, it reenforces this Rule. :)

Anonymous said...

I too use the "credit card" to my advantage as well, but recently came up with an even better way to track my finances; I use 3 cards, with benefits of course. One is for food, one is for gas and the last is "luxury" items, eating out, purchases etc. This way my tracking is easier at a quick glance!

Anonymous said...

Great advice. (It's how I operate.)

The most cash back you can earn from the best mix of credit cards is driven by your particular spending profile -- especially how much you spend in various categories (e.g. gas, grocery, restaurants, utilities, etc.)

The free calculator tool at Credit Card Tune-Up: Maximize Your Cash Back Rewards (www.CreditCardTuneUp.com) makes choosing the best cash back card (or mix of cards) pretty easy. Given your spending pattern, it calculates your expected annual rewards for each of the leading cash back credit cards and even determines your best mixes of cards.

You can use the tool for free at http://www.CreditCardTuneUp.com/ .

Michelle Jun said...

Did you know that credit card companies can change the terms of your contract at any time? That’s just one of the credit card traps that can trip up consumers and lead to spiraling debt. Consumers Union, the nonprofit publisher of Consumer Reports, has put together a lighthearted animated holiday-themed satire about abusive credit card fees and practices. Check out “It’s Always Christmas Time (for VISA)” at www.creditcardreform.org. Be sure to take action after viewing the animation!

ASAP Credit Card said...

Great points!

I hate when so-called "debt-gurus" tell people not to use credit cards. I mean, there's definitely some individuals who shouldn't use credit cards! If you're irresponsible and can't control your impulses-- you shouldn't have a credit card! But for most people, if they're used correctly, credit cards provide many benefits you can't get by using cash.

1mil said...

Here's an update. Less than a year later I have two credit cards with the highest possible available credit on both! w00t!

Your friend in credit card stuff, 1mil from millionster.com

Credit Cards PI said...

Don't let the credit card companies take advantage of you-- take advantage of the credit card companies! And that's exactly what you're doing! Great job!

Of course, if everybody was as savvy as you-- many of these reward programs and other perks wouldn't be offered. So I guess we're lucky most people haven't figured it out!

credit card guide said...

Credit cards are convinient. I use them not only for purchases but also for frequent flier miles. I do not use any cash. My plastic is always with me. If you use your credit cards wisely, you will build strong credit. With good credit card you will take benefits and save your money.

lastAutumn said...

I agree that credit card can be dangerous when used unwisely. And it's difficult for people with bad credit to get a good beneficial credit card. But as you build your credit to be good, you can take many advantages of good credit cards. So I don't think that plastics are complete evil.

Johnny said...

Credit card should be used wisely. If possible it should be used only in an emergency situations.

Valerie "Natural" Morrison said...

i'm anti credit card use, especially if you don't have an emergency fund. many people don't. too many things can go wrong and your interest free loan can turn into a night mare. i love your site. i added it to my blog roll if that's okay

Anonymous said...

“Skimming….the new wireless identity theft!”

You’ve heard of hacking, but do you know what “skimming” is? Wireless identity thieves, called “skimmers”, can steal your RFID information out of your wallet or purse while the cards are still in place. All they need is an antenna hooked up to a PDA in their shirt pocket or a laptop with deciphering software. As the victim walks by, their information can be stolen with the silent sending of an RF pulse, the thief can then replay that pulse and use that information to your detriment. Imagine what can be done with a door pass card, your library card, your driver’s license or your debit or credit card information?! And they never have to go through any of the credit checks to use it!


To stop wireless ID theft, Wisteria House Products, of Arizona, has created a device, called the Armadillo Dollar (www.armadillodollar.com), which will shield your personal information from being stolen. It is a novelty dollar made with a specially tested material that when placed in your wallet, will protect the user from random wireless theft. The Armadillo Dollar camouflages your RFID cards and makes them invisible to would be thieves.

Greg said...

Credit cards are financial cancer.

Financial magazines talk about credit cards as if they are a good idea. That's in part because credit card companies are big advertisers, and in part because the editors realize that they probably can't convince you not to carry them, so you they might as well dole out advice on using them.

Mike said...

I never use a debit card or write a check, and I hate paying with cash (I never do, only exception is vending machines!).

For one, it really makes me feel more secure -- I completely minimize who has 'direct' access to my checking account, who links to it, who can screw it up, etc.

Second, I earn hundreds of dollars of cash back rewards each year and never pay interest.

Third, I have built a substantial amount of credit by charging substantial amounts of money, which allows me to have a top-notch credit score, low APR on vehicles and great rates on my homes!

So in other words, I completely agree!

Brandon said...

I do the same thing, I charge every dime I can (gas, groceries, utilities, McDonalds, or any other purchase) and pay it in full each month. Around November or so, I've probably spent over 35 grand which translates to about $400 cash back.. this is my Christmas fund. I can do almost all my Christmas shopping thanks to my creit card company.

Vats said...

I Agree. Credit cards must be fully paid and while using credit card one must always think if he would have shelled out cash for that purchase.

-Vats
http://www.vatsinvesting.com

Money Advice said...

Nice post! Just watching our expense and controlling the way of spending money by credit card is good idea as u said.The reward program is good concept for credit card, so that we can spend it way accordingly the amount which we can able to pay back for it. For more information of credit cards click below link:
http://www.canadian-money-advisor.ca/secure-credit-card-info.html

Reggie said...

I like your blog

But, I've got to disagree with your rule #1, but, if you can do it and it works for you - more power to you.

Reggie.

Jay@PersonalFinanceHacks.com said...

When you pay cash, you can "feel" the money leaving you. This is not true with credit cards. Flipping a credit card up on a counter registers nothing emotionally. If you use credit cards instead of cash you will spend 12-18% more. This is money you could have saved. So even if you're able to pay the balance every month, you're still spending more than you would be had you spent cash. Just my 2 cents.

Adam said...

Couldn't agree with you more, and the many posters above who offer valid arguments in favor of credit card use.

I'm always surprised by those who are actively engaged in the personal finance community and try to DISSUADE others from credit card use. There is no argument here; credit cards offer rewards and short term loans on which you can accrue interest. The unbiased FACT is that NOT using a credit card will cost you more than using the credit card.

The opposing argument is that credit card use will cause us to accumulate out-of-control debt and promote unrestrained spending--are we really a nation of people who lack the responsibility to manage OUR OWN money? It seems to me the credit card isn't the evil here--it's our own incompetence.

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Gert said...

If you are in debt, it's also a possibility to take an Balance Transfer Credit Card with 0% interest rate! At that moment you can use all your money to pay of your debt, instead of paying interest.. Good option to work your way out!

Anonymous said...

I agree...credit cards have their place. I pay off every month and go for the rewards. some great stuff I learned here:

www.milecards.com

bugbear said...

I think if someone has a master view of their finances so that at any time they know where they stand, and they have proven to themselves that they can keep spending below their income for at least a year, then they can probably handle using a credit card as a method of payment and pay it off every month. It requires honesty with oneself and the ability to say "no" to purchases and to pressure from peers/girlfriends/boyfriends to spend beyond your means. With benefit of hindsight, I would recommend that 20 somethings not use credit cards until they have graduated from college AND have followed a budget successfully for two years. After that, they are probably good to go since they will at that point have the tools to know and control their finances.

bugbear said...

The fact that you pay your credit card bill off in full every month is still not a guarantee that you are making the *best* use of your income. While on the face of it, it looks like you are "getting money back" for nothing from the credit card company, keep in mind that with credit cards you are very likely overspending beyond what you would spend if it were *cash* or a check coming out of your wallet with each transaction. Somehow, numbers on a credit card slip don't have the immediate import and weight to most of us that actual cash does. When using a credit card, most people spend 15-20% more than you would if you were spending cash or writing a check. So unless you actually decide your spending ahead of time by using a spending plan, you are probably losing money to the tune of 15-20% by purchasing things on the fly with a credit card, then getting back only 1-3% of the total purchase in c.c. rewards.

This is something to be more aware of. To me, if you don't have a monthly spending plan, there is no way you can be maximizing the use of your income. You could be doing fine in the sense that you are not racking up interest charges on your cards, but spending more than you might want to be if you really thought about your spending and planned and budgeted it out and then checked back in with your budget at regular intervals.

If you *do* have and use a spending plan (like the envelope system, but on a spreadsheet or YNAB for example) as a central map of your monthly finances, it is definitely safe to use a credit card and get the rewards, maybe even better than using cash.

bugbear said...

Holy cow, blogger lost my whole comment!

Ok, what I said was, while this rule is a good start and will at least keep you at out going into debt for consumption items, believing that this is a great deal may be overlooking something important.

People tend to spend 15-20% more when they use credit cards as a form of payment, compared to when they use cash. Something about the little slips of paper with numbers on them just doesn't have the same emotional impact to register with us that a stack of bills leaving our wallet, or even a check, has.

So, by using a credit card, you could still be spending 15-20% *more* than you would have if you were using cash or checks. And the 1-3% cash back can distract you from that.

Really, the best way to make the most of your income in my opinion is to always have a monthly spending plan and check back with it. I do it with an Excel spreadsheet that slices and dices all my spending for me into like 30 different categories and tells me when I'm over budget, and if not, how much money I've got available to spend in each category. YNAB is a good option for this (much better than Quicken for base-level, household budgeting financial management0 for those who are not fairly advanced spreadsheet users. (knowing how to use array formulas and how to use the SUMIF command are key, if you want to know.
Keeping out of credit card debt by only spending what you can pay off in a month is a good start.
But....If and only if you use your *spending plan* as the primary reference when deciding on your spending, then I'd say that using a rewards credit card and paying it off may very lead to the best use and return on your spending money. Otherwise, I'd say using a cash envelope system is better, because you always will have a visual cue of how much $$ you have left until the end of the week or month.

Bill M said...

Credit cards are only for smart people that know how to spend money, if you don't you need a debit card.

The Oakeys said...

Sure, there are some good things about credit cards, but the there are at least two aspects that are extremely detrimental. First, it very difficult to track how much you're spending in each area of a budget, making it nearly impossible to budget while using credit cards. Secondly, There have been several studies done (Dun & Bradstreet) as Bugbear pointed out that show that people spend between 12-18% for the same items while using a credit card as opposed to cash.

Brantley said...

Sure there are positive aspects to using credit, but there are two that are seriously detrimental. First, you cannot accurately track how much you are spending in each area of a budget, making it near impossible to budget properly while using cards.

Secondly, it is proven that people spend 12-18% more for the same items while using credit cards as opposed to using cash.

Use cash, or when you need an electronic form, use a debit card.

Bank account said...

Credit card are for everybody. People should only know how to manage their money. They should limit their selves as to spending.

CUA said...

i have made myself a set of rules when handling credit cards and it work fine for me so far.

bugbear said...

Hi, this is bugbear again, back after several months.

I have shifted to a cash envelope system from just using a virtual budget, at least for all of myweek to week spending (3 envelopes:food, gas, and fun spending, plus one for "Visa").

I am saving an extra 300 dollars a month doing it this way because there is no way I can fool myself that something is in budget when it isn't, and I can't lose track of my budget because the budgeted money is sitting right there in the envelopes, easy to see and keep track of..

I actaully still do use my credit card some of the time, but only after checking the cash envelope to see if the money is there to make the purchase and whether I will have enough left for the rest of the month.

Then after using the c.c. (instead of the cash) to make the purchase, I take the equivalent amount of cash out of the food, gas, or entertainment envelope and put it in the "visa" envelope.

My cash envelopes thus get adjusted, I have an aggressive system to keep myself within my predetermined financial limits and plan, and I get the paltry 1% back from my credit card. But it's still 1 percent. And I'm doing it without overspending.

Ryan said...

I think that when people get a card they think they have free money because I know i did in college when I got a $2000 limit card and maxed it 3 months and spent the rest of the time paying it off.

Mcneri said...

Credit Cards are simply the best thing for the disciplined individual who knows how to manage his/her finances. In the last couple of years, I have practically held interest-free loans of up to 120 thousand dollars simply by using promotional credit cards, paying off my balance ALWAYS if there will be an interest accrual and making almost all my purchases with credit cards.
If you are not disciplined with your spending, you will get fried afterall the credit card companies are out to make money too!

Heaps said...

I love how you have this as your number one rule. I personally try to use my credit card as much as I can as well. I've only had credit cards for about two years now but I have already gotten three gift cards from the prizes (a total of $250 worth from Macy's and Footlocker).

And the best part is that I don't have to pay a fee (at least not yet). So the benefits outweigh the costs no doubt. Great post and I'm glad there are always others who feel the same way about credit cards.

Cheers,
Wahid

Ganar dinero said...

Is nice to have and use a credit card, the fun ends when you have financial problems and you start to cover your expenses with credit card debt. Don't do it. Instead of acquiring new debt, try to get more income. Yes, it's the harder way, but is the correct way.

Aida said...

Thanks, very informative post. Also I found out about the NetWorthIQ website. I'm going to sign up and check it out. thanks!

Cat said...

Good rule - and if you have an outstanding balance it is worth switching cards periodically nowadays - 3 months of 0% seems like nothing compared to what's now of offer.