This may shock some of you—I have a credit card.
In some personal finance circles, such words are considered blasphemy. In fact, there are some that may not have made it this far in the article because that first sentence led them to slam their laptop shut and say a few choice words about me.
I’m sorry to disappoint some of you, but it’s true. I have a credit card. Do I have a balance on it? Of course not. That’s insanity. It’s paid off every month.
I obviously don’t view credit cards as evil, but as a financial tool that must be used wisely. If used unwisely, the consequences are severe. But, I also don’t view credit cards as an essential financial tool. You can live your life without one. So, if you struggle with spending and debt, it may be best to avoid credit cards or cut up the ones you have.
For those who either have a credit card or are considering getting one, the question asked is often, "what is the best way to go about having a credit card?" I’m glad you asked. Here are some essentials practices in order to use a credit card wisely:
1. Limit your credit cards. Any time I see or hear of someone with numerous credit cards, I get concerned. First of all, the likelihood of mismanaging one of the cards increases dramatically. Secondly, numerous credit cards often either indicates an inability to say “no” to store credit card offers or you have a lot of debt. Either way, your spending is usually out of control. So, limit your credit cards. Two cards is usually plenty.
2. Never, ever, ever keep a balance. Make no mistake—a credit card balance is debt with a very high interest rate. Consider this—you purchase a chair, ottoman, and couch for $5,000 with your credit card. The credit card has an interest rate of 20%, and you can only make the minimum payments of $200. Over the next twelve years, you will pay a total of $8,418 for your $5,000 purchase. Ouch. Never, ever, ever keep a balance.
3. If you don’t have a budget, don’t use a credit card. I cannot overstate this point—your credit card usage should align with your monthly budget. As demonstrated in the second point, the only way to wisely use a credit card is to pay it off every month. The only way you can pay it off every month is to have enough money in your bank account to cover the balance. How can you know if you have enough money in your bank account? Have a budget. Without a budget, you’re playing a high risk, costly, guessing game.
4. Don’t play games with credit cards. Transferring balances to get an introductory rate. Getting the sign-up promotional offers. Stay away from this. One small misstep can result in significant financial costs. Don’t play games with credit cards.
5. Never take cash advances. Most credit cards will provide you a short-term loan at an ATM. This loan, known as a cash advance, is incredibly expensive. You get slammed with fees and a ridiculously high interest rate. Cash advances are terrible deal. Avoid them.
6. Always pay on time. What happens when you pay your credit card late or miss a payment all together? You get hit with a late fee and interest on the balance. Late payments are very costly. Avoid late payments by setting up notifications or reminders on your calendar.
Credit cards can be a useful financial tool, but unwisely managed, they can become a great financial frustration and burden. If you choose to have a credit card, be smart about it. Don’t keep a balance; pay on time; and never take a cash advance.