I said before I would make a post about credit cards, so here we go! First we're going to talk about how NOT to use credit cards, and then how to successfully use them, and then why you should use them.
A lot of people have this hardcore hate of credit cards, which is deserved in some respects. Many people have ruined their financial life because of them. These people treat a credit card as free money, which is a BIG mistake. The key to successful use of a credit card is found in the video below.(Wait for the commercial to load, sometimes it says "can't load video," just wait a minute.)
Mind blowing right? Don't buy stuff you can't afford. Let's say you have ran out of money in your food budget. You think, "hey, I can just charge it to my credit card, and then pay it off later!" You go to the store and buy $100 worth of bacon (mmmmm). When the bill comes around, you still don't have the money, so you don't pay your bill. Credit card companies are hoping you don't pay your bill in full every month, this is where they make a decent amount of their money, by charging you ~26% interest Next month, assuming you haven't charged anything else to your credit card, the bill is somewhere around $126. And so begins the monster of debt.
The key, as stated in the video, is DON'T BUY THINGS YOU CAN'T AFFORD. If you don't have the money in your checking account, don't charge anything. Don't count on getting money back from a friend to pay for it, don't count on receiving an inheritance, don't buy anything if you don't have the money! You will put yourself in a horrible hole that is very hard (and expensive) to get out of. If you don't have self control, don't get a credit card. Simple as that.
Now, how to use credit cards successfully. Armed with Mint (previously discussed in another post), whenever we make a charge, that money gets subtracted from our budget. It helps us realize that we have already spent a certain amount, and that we shouldn't spend anymore. If our credit card bill ever gets over ~$200, I pay it off early online. When I do that, the money comes out of our checking account and gets applied to our credit card and stops us from ever getting into the hole of debt. Like I stated before, you have to treat your credit card as a debit card, or else you can very easily get yourself into trouble with debt. Time for a little prophetic smackdown before we get into why you should use credit cards.
Interest [on debt] never sleeps nor sickens nor dies; it never goes to
the hospital; it works on Sundays and holidays; it never takes a
vacation; it never visits nor travels; it takes no pleasure; it is never
laid off work nor discharged from employment; it never works on reduced
hours. ... Once in debt, interest is your companion every minute of the
day and night; you cannot shun it or slip away from it; you cannot
dismiss it; it yields neither to entreaties, demands, or orders; and
whenever you get in its way or cross its course or fail to meet its
demands, it crushes you.
J. Reuben Clark Jr. in Conference Report, Apr. 1938:103.
If you need a translation, he's saying don't get into debt. Why should you use credit cards? Let us count the ways.
1. Saves you money. Using a credit card is one of the most effective ways to build your credit score (there are other ways, but credit cards are the easiest and most effective). Why is it important to have a good credit score? A credit score is basically a score that says how reliable/responsible you are with your money. If you have a high credit score (740+), that says to a bank, insurance company, and sometimes even your landlord that if they loan you money, you will pay them back. They are much more likely to offer you a loan at a lower interest rate. If a person has a low credit score, the bank takes a bigger risk when they loan them money, so that person has to put down a bigger down payment and has a higher interest rate. If we're talking about a large loan, such as for a house, even fractions of percentages in your interest rate can mean a lot of money, so its important to have a good credit score, and RESPONSIBLE use of a credit card can improve your score. (There are many other considerations when someone makes you a loan, but a credit score is kind of the backbone.) If you want a free way to see your credit score and be alerted to any changes, go to https://www.creditkarma.com/
It's not your exact score, but it gives you a good idea of what your score is. If you want your real score and hardcore credit protection, you have to pay a company around $10 a month. (Paying to see something that is ours.... stupidest idea ever.)
2. Rewards. Case in point. We applied for a Citi American Airlines card and their promotion was if you spend $1,500 in the first three months of having the card, they will give you 75,000 frequent flier miles (It takes 80,000 to go round trip to Europe for two people, lower for USA, Caribbean locations.) We bought Jessica's bike with the card, and then bought all of our groceries/books using the card. We ended up with all the points, and we are continually using it to get to our 80,000 mark. Two round trip tickets from Salt Lake to Rome is ~$3,000, so essentially we made $3,000. It's really important to think about why the credit card company would offer such a deal. They're hoping you spend $1,500 you don't have (refer to the video as to whether that's a good idea or not) and then you will end up paying credit card interest payments to them, essentially canceling out any savings/bonuses you get. Strategy: DON'T BUY THINGS YOU CAN'T AFFORD. Don't go buy a new bike solely to get some reward. If you are going to be making a large purchase (or a series of large purchases) such as a new motorcycle, bike, TV, furniture, etc. sign up for a credit card with a big reward, use the credit card, get your reward. A lot of the cards have an annual fee (between $60-90) but most of them will waive the fee for the first year, and if you call customer service when your year mark is up, you can usually get it waived again and again, since they want to keep your business. It's important to remember that when you apply for a new card, they check your credit, which lowers it by 2-4 points, but after two months of on time, full payments, the difference is made up and it will only raise your credit from there on out, as long as you make on time payments.
3. Convenience. Its great to have to carry just a card instead of cash. If it gets stolen, you just call the company and cancel it. The advantage over debit cards is that you can get rewards with credit cards, while debit cards have the advantage of taking the money out of your account right then and not putting you into the mindset of "I'll pay it off later."
I'm really tired so I'm going to sign off, but not before doing a quick recap.
1. If you don't have self control, don't get a credit card.
2. If you don't have money, don't buy things.
3. Don't buy things solely to reach the purchase limit to get rewards.
Pretty simple right? Like I said at the beginning, a lot of people are anti- credit cards, and I can see their point a lot of the time. Most people don't have self control, and get themselves into trouble. If you do have self control and are able to be responsible with your money, credit cards are a great way to help yourself out and get some sweet rewards.
Here's some links to some hardcore bloggers that talk about credit card bonuses (specifically travel)
http://thepointsguy.com/beginners-guide/
http://www.frugaltravelguy.com/p/rookie-tips.html (read the intro letter he has posted)
I agree. To add to what you said, people shouldn't charge something to their credit card because they expect to get money soon, like a tax refund. Get the money first, then spend it. Seems obvious, but so many people make that mistake, then something comes up and they need the money for something more important, or the expected money never comes and they have debt with no way to pay it off.
ReplyDelete