Financial Independence

Should You Use Credit Cards?

credit card

We’ve all heard horror stories of people who dug themselves deep into a hole with credit cards. Way too many good folks let credit card debt spiral out of control, even though the internet is full of good advice on how to manage your finances, the credit card industry is big business.

Some financial advisers recommend a card cutting party, other suggest keeping your card in a block of ice in the freezer to keep you from impulse purchases. That way, if you really, really want to buy something, you have to wait until the ice melts before you have access to your card. If you are an impulsive buyer, or you tend to buy more than you can afford on credit, these are good ideas designed to keep you out of trouble. A credit card can be a dangerous weapon, or a wonderful tool, depending on how it is used.

Being responsible with credit can take on many different forms. For me? I rack up thousands of dollars per month in credit card debt. I use a credit card for literally everything. I don’t even buy a cup of coffee without pulling out my credit card. So, am I being foolish with my money? Am I a slave to the credit card industry? Not at all.

As an aside—I can remember when people still payed for things with checks. You'd stand in line behind someone and wait for them to fill out this paper form in order to pay for $1.37 worth of snacks at the gas station and wonder the whole time,"Why don't they just pay with cash!" Then credit cards became more commonplace, but still you'd be stuck in line waiting while the credit card was run through a carbon copier machine and the clerk completed the long drawn out process of signatures and copies, and the whole time you were in line wondering, "Why don't they just pay with cash!" But then at some point it flipped. Now, it's the guy that pays with $1.37 in cash that holds up the line as the clerk has to go into the back office, open a safe, come back out with a roll of pennies to break open into his empty cash drawer, and finally count out the change slowly and carefully. The whole time you are standing in line behind him wondering, "Why don't they just pay with credit card!"

Cash is cash, checks are cash, but credit cards are not cash. They can be used like cash, though.


How to Use Credit Cards

I have flown all over the world on free airline tickets with my credit card points. I’ve rented luxury cars while on vacation without paying a dime. But one thing I don't do is ever pay a dime of interest. I don’t buy things that I can’t afford just because I have a credit card. In other words, if I can’t afford to pay cash for it, I don’t buy it, whether I have a credit card or not. I am not the ideal credit card customer. When credit card companies send out enticing offers, they are not looking for people like me, but they cast a wide net and they catch plenty of fish that don't treat their cards the way I do.

What credit card companies are looking for are people who take advantage of the line of credit to buy things they can’t afford unless they are only making the minimum payment. That demographic is the sweet spot that makes the credit card business so lucrative. Once the balance rises to where the card holder can only afford the minimum payment, they have you right where they want you.

Once your credit card debt reaches a certain amount, you have to go to work every day, just to keep up. And by making the minimum payment, you get to work for years while barely making a dent in the principal. That minimum payment is designed to just barely bring the principle down, so that a maximum amount of interest is paid over the life of the loan.

Getting into the trap of carrying high-interest credit card debt is all too easy to fall into, and card companies know it. That’s why there are daily offers in the mail trying to entice you to sign up and earn a prize in exchange for selling your soul to the machine.

But if you have the discipline to live well within your means and pay your credit card balance in full each month, then it can be a wonderful resource. Besides the conveniences of not having to carry large amounts of cash, and the simplicity of renting a car or a hotel, the rewards that some card companies offer are real. They have to give you the rewards even though you aren’t the reason they offer them. If it were possible, the card companies would love to exclude anyone who doesn’t carry a balance from cashing in on the rewards. Unfortunately for them, that would be a public relations nightmare. The card companies would blatantly be rewarding irresponsible behavior and not rewarding those that are responsible.

Report from the CFPB

If you are sure you can handle the responsibility of having a line of credit in your back pocket, then look for a card that offers the types of rewards you would like. There are some that offer cash back, and others that offer gifts such as free airline tickets or car rentals. Since I travel a lot, I tend to prefer the cards that offer free airline tickets, but for others, just a simple cash back makes sense.

Merchants are charged a fee of roughly 2% per transaction (give or take, depending on how the card is processed and what kind of card it is). That fee is paid by the merchant, who builds the cost into the product that is being sold. Since the merchant pays the fee, there is no savings to you by using cash. By using a credit card you are actually reducing the cost of the product for yourself by means of receiving a "refund" in the form of a credit card perk. The only catch to you is that you must pay for all of your monthly purchases at one time at the end of the month. That's it. So long as you spent less than you are able to pay it's catch-free.

Credit card companies know not everyone is so great at math, and they know that "life happens." It is up to you to be sure that you don't fall into their minimum payment trap. And should you find yourself falling into that trap, it's up to you to extricate yourself as fast as possible.

In summary, credit cards are a great idea if you can find one that has no, or low, annual fee and offers rewards that are useful to you, or cash back. Just make sure you pay it in full every month—no exceptions. We want everyone to live a financially independent life, and if you can do it while sticking a tiny knife into the credit card companies, all the better.

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