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Some folks are absolutely against credit cards because they feels it encourages folks to spend more than if they were using cash. They feels that without credit cards, many folks who are now in credit card debt would not have gotten into debt in the first place.
I, am in the opposite camp. I use my credit cards all the time to earn reward points. Plus, I know there are a ton of hidden perks and consumer benefits to using credit cards. But I have always paid my bills fully and never carried any credit card debt.
Both camps though, agree on one thing. And that is that we should not get into any credit card debt. I’ll organize this post into the following. I’ll start by going over:
- The basics of sound financial management
- What not to do with your credit card
- How to save money with your credit card?
Basics of Financial Management
I’ll start by saying that to use credit cards responsibly, it really starts with getting the basics right in your personal finance life. So what are they?
1. Spend Less Than You Earn
This is so elementary but it has to be mentioned over and over again. As long as everybody follows this rule, this country would not have the problem that it is having.
2. Use a Budget
Unless you make way much more than what you spend every month, it pays to budget so that you know where does your money go. One of the things that you have to budget for are some leisure and discretionary spending. Many times, a budget is thrown into chaos because of things like an unexpected birthday party invitation and repairs on cars or house.
3. Make Lists
If you ask any coupon clipping Mom, she’ll tell you that without making a grocery list, you will go way over your budget by aisle 5! The key to sticking to your budget is to make a grocery list, get your coupons ready and then speed through the aisles.
But the same concept should be applied to everything that you spend on. For example, why make a list only for groceries? Why not do one for any major shopping spree? Whether you are buying clothes for the kids or for yourself or whatever, you could always make a list.
4. Know Your Real Needs vs. Wants
This is where I think we as a nation have failed. Over the last three decades, we have borrowed to consume. We have not put the borrowed money to productive uses. Instead, they went to things like “home improvement”, a second vacation home. There are nice to have, but not a real necessity.
We may need a cell phone, but do we really need the latest iPhone? We need a TV, but do we really need the latest Plasma 60 inch screen?
5. Develop and Set Your Financial Goals
Figure out how much emergency funds you need, how much you need to save every month in your 401k or IRA. Work out a reasonable savings plan. The plans may change but you should always have one.
6. Monitor Your Spending
This is the block and tackling in personal finance. It is boring, but it has to be done.
OK – you might wonder why did I have go through all of that as I was supposed to tell you how to use credit cards responsibly? Well, if you are not disciplined and follow the above steps, then there is no way you are going to use credit cards responsibly. Being financially savvy shows up in all other aspects of your life.
How Not to Use Your Credit Cards
Now with that out of the way, let’s go through some tips on how not to use credit cards.
Do Not Use Your Credit Cards for Cash Advances
Credit Cards allow you to withdraw cash at ATMs. But please never do that. You will be hit with a cash advance fee of about 3% (in fact, Bank of America has now raised that to 5%!).
Do Not Make Late Payments
Never be late for your payment especially if you carry a balance (though both Brad and I will agree that you should never carry a balance). And if you are still on an introductory period of a 0% balance transfer credit card, then you’d better make sure you are not late or else your 0% will probably jump to 29%!
If you pay in full every month, the occasional lapse would probably not hurt you. A credit card company will only report you to the credit bureaus if you are late by more than 60 days. You may be slapped with a late fee and some finance charges, but if you have always paid on time, there is a good chance that they will waive it.
Never Exceed Your Credit Limit
You should always have a buffer zone. Never charge anywhere remotely close to your limit. This will ensure you will always have a good “credit utilization ratio”, which helps your credit score.
Do Not Be Tempted by 0% APR Purchase Offers
It still pisses me off to see ads on TV telling folks that you can buy furniture for “no money down” or get 0% financing for “up to 24 months”.
Here’s the deal. If you cannot pay 100%, then don’t buy. Do not be tempted by these 0% for 12 months offer. It is the road that Brad says will lead to credit card debt (and he is right).
How To Be Savvy With Credit Cards and Save Money
If you are being a responsible credit card user, then you have to take the step further and actually make money from credit cards. How? By simply getting a reward card.
For most folks, the best thing one can do is to actually get a cash back rewards credit card or a gas credit card. These cards allow you to earn cash rebates. Typically, a basic cash rebate card would allow you to earn 1% for every dollar that you spend on the card. But the better ones allow you to earn more than 1% (typically 3% to 5%) on things like gasoline, supermarket, restaurants, travel and even online shopping.
The trick to choose the card that will make you the most money is understand what you spend on your card. The first thing you have to do is to make a list of items that you charge to your card. a typical list would look like this.
- Online Shopping
You then have to research the cards and their rebate formulas and determine which will save you the most money. It’s quite a tedious task, well worth it as it can help you save a couple of hundred dollars a year.
If you are more of a rewards person, most credit card issuers offer some form of rewards card that you can take advantage of. All of the major credit card issuers have reward programs. Probably the most famous program is the American Express Membership Rewards program. With reward programs, you can redeem points for the following:
- Airline Tickets
- Hotel Stays
- Car Rentals
- Gift Cards
- Charity Donations
Most allow you to earn one point for every dollar that you spend on the card. Some programs have points that never expire. Some expire within about 5 years. But if you are the sort of person who pays in full every month, then using reward points to get an free airline ticket for a family vacation, or using it to redeem for an apple iPod for a christmas present is a really nice present for yourself.
I’ll stop here. For some folks, using cash instead of a credit card may work for you and make you less prone to getting into credit card debt. Do what works for you. But if you are not willing to give up using your credit card, then make sure you set up your finances such that you do not overspend or get into credit card debt, pay your bills in full and most importantly, choose your credit card wisely, save money and get free stuff from your card.