Most financial gurus advise people to use credit cards to build up credit or even to travel for free. Practically every single one of them say that if you cannot use a credit card right, you should get rid of your credit card. They leave out the part on how to use a credit card right.
The problem is that if you use a credit card and you mess up on the payments, even once, you could be paying excessive amounts in interest and fees. Then the build up in credit and rewards are no longer worth it and usually negated entirely. In this post I will write about how I personally try my best to use my credit card right.
Do Not Treat The Rewards Like Something Special
Many cards provide incentive rewards within the first few months or even a year. These are ploys to convince you to spend more money than you need to. Some say to try to spend their credit cards on rent and many necessities, not anything you do not need. Everyone says that and very few actually follow this. This has two effects. The first is obvious, people overspend and debts collect.
The second is less obvious but even more harmful. In my observations, when people purchase something that was not a necessity yet provided them with a reward, this will rewire their brain to make them think it is a necessity and buy it more often.
Let’s say I needed to purchase $5,000 in 3 months to get 50,000 points (not an a typical rewards program), that is $1,666/month. Which is more than twice my rent alone. I will never spend that much typically. Even if I would, the credit card company could refuse to count some of those purchases so I may have to spend more than $1,666/month anyways. To make up the difference I would have to go shopping and purchase something I do not need. I may know at first that I am treating myself, but the rewards that follow make me believe the object is now a necessity and I may continually purchase it.
What I Recommend
Never follow those incentive plans. Instead, just treat the cards like it will give you the same rewards no matter when you use it. Treat the rewards as something to help you save for a trip, not as a way to get a free trip. If you cannot do this, you may want to forget about getting a rewards credit card altogether.
Train Yourself To Avoid Using Credit Cards
I know how to use a credit card right. But that is because of over a decade of educating myself to believe that credit card debt should be avoided (thank you mom and dad).
Some may believe that I am lucky to be educated to handle tools that have such infamy behind them. Remember though, education is not a process, it is a lifestyle. You are not a machine, you do not just take in information and then go complete tasks, you are constantly taking information and adapting yourself to the information. I am constantly assuring myself that credit cards should only be used to ensure a good credit to buy a house and follow any other venture I desire.
I constantly hear people say that controlled credit card usage is good. But then I have to remember that I do not want to be what most people are, even when it comes to financial gurus. For instance, many financial gurus I listen to say that they use credit cards all the time to get points. Yet they say it is better to use cash and almost always cite the study that shows using cash actually signals pain. That is a bit contradictory.
What I Recommend
You do have to use a credit card every once in a while to build credit. But how can you remind yourself that you are giving someone some of your hard earned money when all you are physically giving them is a card? The answer is simple, use your credit card for painful purchases. These include car repairs, and medical bills. The idea is that the bill should be something you dread. I have used my credit card in these purchases, I felt like I was hurt and that such hard earned money is being used for something that should not happen. The key is that you need to pay off that balance IMMEDIATELY. If you forget about these purchases then your credit card company will start adding the interest and fees with little remorse.
Credit cards thrive in online purchases. The economy would not have grown the way it did without online interchange of money. However, people see credit cards as the best way to purchase anything online, mostly because of their security.
What I Recommend
Limit online purchases. I know this is rich coming from a blogger that gets paid by online ads. However, I honestly believe eCommerce would be very profitable if people also purchased many of their items at stores, at the very least groceries.
With the convenience of online shopping it is no wonder online shopping addiction is now a term. I rarely go online shopping, mostly because I do not fall for consumerism. I honestly go shopping outside of my needs mostly for other people’s gifts.
Credit cards are useful tools, but they have an edge. You will use them to your advantage, or their issuers will use you to their advantage. There is a thin line between these two extremes that is only separated by discipline. Even messing up once will mess with your credit and your money so note that your future could depend on having this discipline. Developing discipline to use a credit card right will help you on the way to forge your wealth.