Don’t Be Afraid of Credit Cards

Don’t be afraid of credit cards.  Aversion leads to ignorance and ignorance due to lack of knowledge and insight leads to mistakes.

Oftentimes, a conversation with an acquaintance, colleague, or friend inevitably wanders into the wild jungle of personal finance.

Folks love to chime in their opinions and perspectives on credit cards.

Some swear against credit cards in totality and even cast the whole industry as evil.  “Cut it up, now,” is what they would often proclaim.

Others love their collection of credit cards and invest quite a bit of time, energy, and even money, to grow their inventory.  They enjoy getting the most bonus points or miles and the latest cash back category to take advantage of.

Witnessing the two sides pitch their convictions is at times quite entertaining. There is a clear, logical, and most importantly, practical, way of navigating around this sometimes confusing area of personal finance.

Harvey is here to break it down for you!

Truth be told, credit cards do not bite.

Yes, the banks are in the business of making money.  But they are not evil for focusing on profits.  That is what every company does.

Credit cards are very lucrative to banks. Customers who pay late, request cash advances (withdraw cash from the credit card), and transfer balances (transfer the credit card balance to another card), are the “VIP” customers of these banks as they get to charge yummy fees and assess awesome (from their perspective) interest rates on the balance. It doesn’t have to be so horrible.

Think of your relationship with your bank and the credit card you have under them as a symbiotic relationship.

No, you do not have to pay anything to use your credit card if you choose not to.

Below is some general advice to USE credit cards to your advantage and not BE USED by them:

• You should only apply to credit cards with no annual fee
  • Having four or five cards with $95 annual fees each is really just diminishing return, no matter how enticing the sign-up incentives are
  • How many cash back cards do you really need?  I mean, you will have to spend a lot to take advantage of all the cards you have, and every dollar you do not spend is another dollar saved
  • If you do insist on applying to the ones with a few, try to limit the number of cards you have that do have a fee
    • I have personally limited myself to 1 credit card with an annual fee
      • And I always make an effort to call the Rention Department of my credit card issuing bank and request a refund on the fee at the end of each year or request an incentive to stick with them 😉

• Apply to credit cards with incentives that are relevant to you
  • Don’t blindly apply to credit cards just because they are offering incentives
  • If you have never used Priceline.com to book hotels, plane tickets, and or rental cars, would it really make sense for you to apply for a Priceline.com credit card just to get the bonus points?
    • If you only fly a few times a year, you wouldn’t need an airline credit card
    • The best credit card for the typical person would be a cash back card for every day purchases
      • 2% back is the optimal incentive

• Monitor your credit utilization
  • You should always monitor your credit utilization, which is the percentage of the difference of the sum of your balance and the sum of your total available credit
    • If I have 3 credit cards with a $5,000 credit limit each, then my total credit is $15,000
    • If this month I have a balance of $1,000 on card A, and a balance of $500 on card B, then my total balance would be $1,500 as reported on my credit report
      • This means I am utilizing 10% of my available credit
    • I personally designate some of my credit cards as “no-use”
      • As soon as I get approved for a new card, received the card in the mail, and all that good stuff, I store the card in my drawer, or simply cut it up and do not intend to use it in the future
        • This serves as a “cushion” to my credit utilization

• Don’t apply to too many credit cards
  • Your credit score takes a dip as soon as you exceed 2 hard pulls on your credit report
  • And every time you apply for a credit card for approval, you have a hard pull
    • Monitor your credit hard pulls periodically through a service such as Credit Karma

• PAY YOUR FULL BALANCE OFF EVERY MONTH
  • Never carry a balance
  • If you cannot afford to pay off your balance ON or BEFORE the monthly due date, then you cannot afford the purchases you have been making this past month
  • If you get paid twice a month or biweekly, make a payment to pay off your credit card every time your paycheck comes in
    • This will alleviate the pressure when month-end arrives

• Customize your payment due date to your advantage
  • You can pick your payment due date to fit your money flow better if it applies to you
  • If you get paid every 1st and 15th of the month, you should consider setting your monthly due date to the 3rd or the 17th of each month.
    • No, you cannot keep moving your payment due date to avoid payment

• Tread carefully with “authorized users” under your account
  • Sure, it’s nice and convenient
    • But you are stuck with the charges that they make

• Don’t get too “swipe happy”
  • Yes, every time you swipe, you get a little bit of your money back.
  • If you don’t spend the money, you save 100% of what you intended to pay

All in all, don’t be afraid of credit cards.

Use them to your advantage and enhance your financial life and prosperity.  Stay in control of your financial discipline.

The key is:  Use and do not be used.  This applies to life in generally and definitely applies to personal finance, especially with credit cards.

What are your thoughts about credit cards?  Leave a comment below!  🙂