I did mention that when I was in college I had credit card debt. That really sucked. I didn’t know how to use credit cards responsibly and, to be honest, I was so broke that I would’ve racked up debt anyway. The thing that sucks the most about being poor is that every little unexpected expense pulls you down farther into poverty since you have to charge that and then pay a ton more in interest and fees. Some people that don’t have access to credit cards get payday loans. If you’ve heard credit cards are bad…boy, payday loans are infinitely worse.
Now that I know better, I know how much more expensive it can be to finance your life with credit cards. Yet…I still solely use credit cards!
The difference is that now I not only know how to use them responsibly and how to use them to help me get rewards for using them, but I also have steady income coming in and I only spend what I have already budgeted for.
Why do I use credit cards rather than cash?
- Rewards (cash back, travel points, gift cards, sign-up bonuses): When I sign up for a new card, I always select one that has a decent sign-up bonus. If what I’m looking for is to finance a purchase without interest for a year or so, I look for that. Those are the 0% intro rates, you just have to make sure you’ve paid it back in full prior to the intro rate expiring, otherwise they will charge you all the interest you would have paid during the entire time you’ve had the card!
- Tracking my spending: I like being able to download my statements to keep track of my purchases. This way I don’t have to use a third party app to track my financial data, and I still get to have a view of my spending without having to manually write everything down.
- Keeping my credit score high: Using, and paying off, my credit cards allow me to keep my credit score in the 800s. Your credit score is important because it’s like your financial “report card” and depending on how good your score is you’ll be offered better rates for loans. Even jobs and landlords check your credit score to decide whether you are responsible enough to trust. Utility companies also check your credit when determining whether you need to pay a deposit for your utility account. Having a good credit can save you a lot of money over the course of your life so take care of your score! That’s not to say that you can’t improve your score if you’ve wrecked it, but it will take years to get back what you can easily keep by being responsible to begin with.
- Perks
- Consumer Protection: Credit cards have $0 liability protection. If your cards are stolen and used to rack up debt, you aren’t liable for those charges. Whereas if you lose your debit card and they clear out your account…you’re most likely SOL.
- Rental Car Insurance: Some credit cards will cover your rental car after you decline to purchase their insurance.
- Purchase Protection: Some credit cards will protect purchases you made on the card from loss, damage, or theft within a certain time frame.
- Travel Insurance: Some credit cards offer trip cancellation insurance or insurance for lost, damaged, or delayed luggage.
- Price Protection: Some credit cards will allow you to file a claim if you find an item you purchased on that card selling at a lower price. They’ll refund you the difference.
All of these perks depend on the issuer and the specific card so check your credit card terms to find whether you have this perk as well as the details.
How do I use credit cards “responsibly”?
The most important thing is to make sure you are paying your Statement Balance in full every month. None of the perks or rewards matter if you are paying the credit card company interest every month for the pleasure of using their card. They should be paying you! So learn the difference between the Statement Balance, Current Balance, and Minimum Payment. Also, keep track of your Payment Due Date, which is the date you have to pay by. The Statement Balance is the amount of money you owed when the statement ended during the last cycle. You can see this on the latest statement. This is the amount you want to pay in full every month. The Current Balance is what you owe now after you’ve continued using the credit card. If you pay your Statement Balance in full every month you will never pay interest and you will see that your Current Balance is higher than the Statement Balance until you make your monthly payment. The Minimum Payment is what you have to pay to avoid having your account reported negatively on your credit report. Although it will keep your account current, it will cause you to pay much, much, more than you originally owed because the interest rates on credit cards are very high. If you pay the Minimum Payment once, then you are now going to be paying interest on the entire balance every month until you pay the whole balance down to $0.
I like credit cards because it’s like having a short term loan at 0%. I only purchase what I plan on purchasing, but I do enjoy not having to front the cash all at once.
Example: Not long ago, I had to have work done on the foundation of my house. That was a $10k expense that I did NOT want to pay outright, although I did have the savings. (I’m just allergic to having so much money leave my possession at once.) So what I did is I opened a 0% intro rate credit card that also gave me a bonus for spending a certain amount within a couple months. I now had 16 months to pay it off and I got to keep my money in my HYSA to earn interest while it still could. Not to mention that I did get a bonus for spending that money, so it’s like I got a nice discount on the expense!
These kinds of options are not available to people with poor credit. If I hadn’t had the cash to pay for my purchase, but I still had good credit I could still do the same thing, except I would make sure I diverted $625 from my investments every month and into that credit card so that I could have it paid off prior to the 0% intro rate ending. Having good credit would allow me to finance a necessary purchase and get a discount even when I didn’t have the cash outright.
On the other hand, if I didn’t have good credit and couldn’t come up with the cash: I would have been forced to obtain a loan with whatever crazy rates would be afforded to someone without good credit. Thereby paying a lot more for the same expense than someone with good credit.
Some people don’t care about credit because they think they’ll never buy a house, but that’s not the only reason you’ll want to have good credit.
To Summarize
Credit cards can be wonderful tools to have in your financial arsenal as long as you use them correctly and never carry a balance. If you pay your Statement Balance in full every month, you can benefit from all of the perks, without paying all of the interest most people pay.
Make sure you look at the terms and conditions of your specific credit card to find out when you have to pay it, when it posts, and when it counts.
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