Wise Use of Credit Cards

Credit cards are one of the slippery slopes that get people into the most trouble with their finances. It comes from forgetting that the limit on your credit card is not actually money you have- it’s negative money if you use it. A second common way of thinking that gets people into trouble is the monthly payment mentality. People often think that if they can afford the monthly payment: on their car, house or credit cards, then they can afford the purchase. But the real deal is that you have to look at the big picture. How long are you going to have that debt for? What happens if you lose your job, or have medical expenses? Debt means you have less flexibility- it means someone else calls the shots for your money.

Debt is also expensive. Many credit cards are increasing their rates over 20%. Some cards will raise their rates if you’re late on even one payment- hitting you with higher fees when you can least afford them. Oh and lets not forget that the fees and interest make the thing you originally bought turn out to be much more expensive. So… can we agree, having debt is risky at best and possibly even dangerous. Credit cards are a major source of consumer debt. But cards themselves are not the root of evil.

The Benefits of Cards

Now that I’ve scared you with why cards are bad… and yes, credit card debt has destroyed many people’s lives… but there are benefits of credit cards too. And when used wisely you can take advantage of the benefits. This isn’t for people with a debt problem or a weakness for shopping though- some people are better off cutting up the cards rather than risk the temptation. Take a moment and ask yourself whether you’d be better off without them at all. Be honest.

Purchase protection is a good benefit of using cards. If the seller tries to rip you off or if your product is damaged or stolen, many cards will provide you with coverage for these issues and sometimes even charge back the seller. If you aren’t sure of what you’re getting- it’s good to use a credit card. This protection is extended to online shopping as well. But be careful to only shop with online stores you have heard of and who have a good reputation.

Universal acceptance. The major cards are accepted in many countries. For example if you travel between Canada and the USA, having a card accepted in both countries can be vital in an emergency. It surprises me, but there are also still stores that don’t accept debit (interac) cards but will accept credit cards… so if you don’t carry a lot of cash you may need to use a credit card.

Reap the Rewards

Many cards offer rewards, and this is where I get my credit card company to pay me to use their card. My card gives a percent of my purchases back to me as a credit to my card balance. Since I pay off my card in full each month, I never pay any interest. So in the end I get paid to use my card. Excellent! There are other types of rewards too that you might find more useful, like air miles or store points.

Using Cards Safely

All these tips will be for nothing though if you let your cards get out of hand. Be careful not to have too many credit cards (this includes store cards like Sears). More than two is pushing it. And second (this is most important), don’t carry a balance from month to month. Only pay for something with a credit card if you are going to pay it off right away. In this sense a credit card becomes like a debit card- but with advantages. If you carry a balance, the interest you’ll pay will make it so it’s not worth it. And debt like this can spiral bigger and bigger. Why throw your money down the credit card company’s drain? Keep it for yourself. If you can’t keep your card paid off, then you might want to consider cutting it up and breaking the cycle.

Credit cards can be a dangerous temptation, or a useful tool, depending on your personal habits and financial discipline. Be honest with yourself about what the best approach is for you.