Because of all the bad press about crushing debt and high interest rates, you’d be forgiven for thinking that credit cards are pure evil. Yes, insanely high interest rates and unfair penalties for late payments mean that these little plastic rectangles are not always a very customer-friendly way to pay.
But they do have their uses, especially in the age of internet commerce.
For most consumers, there are three kinds of currency in the modern world: cash, debit and credit. Each has its own rules and own set of pros and cons. I’ve often heard people say that savvy spenders rely on cash because it is simple to stay on budget when you can physically see how much money you have left. Something similar could be said for debit cards: if you don’t have money to cover a transaction in your bank account, then the card won’t work. In short, you can’t overspend.
Credit cards get a bad rap because there is no built-in stop-loss point. You can keep charging until you reach your credit limit (or until the card company calls you to tell you you’ve already exceeded your limit).
Credit cards allow you to have a carpe diem attitude. You can enjoy it now and worry about paying for it later (with interest).
Despite the idea that they encourage frivolous purchases, credit cards can be the perfect tool for spending, if they are used in a certain way.
Pay it off
The first step to enjoying credit card success is well-known. Pay off any balance that you owe. If you owe thousands, this will be a process rather than a one-time fix. Figure out a manageable amount that you can pay every month. Then, knock a little bit off that number, so that you are totally comfortable with it. You can link your checking account to your card account and simply set up automatic payments for your chosen amount each month. The key is to pay consistently, eating up the debt little by little. You can always make an extra payment if you have funds to spare. But at least do the minimum.
Even if you don’t have lots of debt, it is a good idea to link your checking account to your credit card. If nothing else, this will make you aware that whatever you spend with your credit card has to eventually (sooner rather than later) come out of your checking account.
Paying interest is a sin
This leads to the most important rule of savvy credit card use: don’t pay interest. Some “charge cards,” like certain American Express cards, don’t allow you to carry a balance from month to month. Just realize that whatever you spend has to come out of your checking account. Yes, this is an extra step, but it is really the only option if you want to win the credit card game.
So why bother with credit cards?
Why not just use debit cards if it is going to come out of your checking account anyway?
1. Credit cards are more secure. Credit cards have an added layer (or even layers) of security. When you use a debit card, the money is drawn directly from your bank account immediately. When you use a credit card, your account is charged, but you do not actually have to pay any money out of your bank until the end of the billing cycle. This means that you have extra time to review your spending and find errors or unauthorized charges before you actually have to part with your money.
2. Rewards. Credit card companies can pay you to spend. Rewards points or airline miles are their way of getting you to use their card instead of the competition’s. How can they do this and still be profitable? Well, credit card companies earn a fee from the retailer every time you use them (it’s called a swipe fee). What they are doing is actually giving you a small portion of this fee back in the form of points that you can cash in for a discount on airfare or a gift card or whatnot. Of course, to really get value out of a rewards program, you have to pay off the entire balance every month and avoid any fees.
3. Extra perks. Some cards charge annual fees. However, they offer additional perks (roadside assistance, free travel insurance, airline vouchers, etc). If you use the perks, the annual fee may be worth the cost of admission. Sometimes card companies don’t advertise these perks because they don’t want everyone to use them. However, if you read the fine print, you will find them.
If you are smart about it and follow the rules, credit cards can actually be the best spending tool in your wallet.