Credit Cards Aren’t Your Enemy… If You Use Them Rather than Let Them Use You

The amount of digital “ink” spilled decrying credit card debt, and by extension credit cards as an industry is staggering.

Some financial “gurus” say credit cards (and any other form of debt) are toxic to your financial health.

But you know what?

I carry 9 cards, and here’s how much I pay annually in credit card interest, fees, and penalties: $0.

And it isn’t because I don’t charge purchases on credit cards. It’s because I’ve learned how to use credit cards, rather than let them use me.

On average, each year my net savings get “juiced” an extra 1.5% due to credit card rebates, rewards, and promos. Below I share 7 simple tips on how you can do the same.

But first, let’s be clear. Credit card debt is a real and growing problem for many people. If this includes you, here’s how you figure out the optimal way for you to get out of debt based on your personality type.

Overall Credit Card Balances Are Growing, a Lot

Data from the New York Fed show $890 billion in credit card debt as of the first quarter of 2020, a $45 billion annual increase:

*Change from Q4 2019 to Q1 2020

** Change from Q1 2019 to Q1 2020

The Credit Card Industry Is Extraordinarily Profitable for Card Issuers

The Motley Fool presents a breakdown (originally from R.K. Hammer data) of $163 billion in total industry profits (2016), including interest – $63.4 billion, annual fees – $12.5 billion, penalties – $12 billion, cash advance fees – $26.6 billion, interchange (or “swipe”) fees – $42.4 billion, etc.

CNBC shows the rising overall cost of credit card debt from $75 billion in 2013 to $104 billion in 2018, with not a single year of decreases.

Credit Cards Are a Lot Less “Profitable” for the 44% of Cardholders Who Carry Balances

Over time, most Americans learned to avoid credit card debt.

Some avoid it by avoiding having any cards altogether.

Others keep their cards, but stop using them. According to the American Bankers Association’s May 2020 Credit Card Monitor, 24% of cardholders haven’t used their card in the past quarter.

That report also shows 32% of cardholders use their cards, but avoid carrying a balance.

Just 44% of cardholders carry a balance. However, as reported by Supermoney.com’s 2020 Consumer Credit Card Industry Study: “Americans pay interest on two out of every three credit card accounts… The average household with credit card debt has $8,733 in credit card debt.”

This is likely because cardholders who carry a balance do so on multiple cards, and have more cards on average than those who don’t carry a balance.

Card Issuers Love Interest and Fees, but…

Credit card debt is what’s known as “unsecured debt.” If you owe money to your card issuers and stop paying, they’ll try to convince you to pay:

• They’ll send you notices.
• They’ll charge you interest, fees, and penalties (which you could still choose not to pay, especially if you don’t have the money).
• They’ll report your default to the credit reporting bureaus, which will cause your credit score to plummet (35% of your score is based on your payment history).

What they can’t do is take your home, your car, or your belongings.

They have to write off the majority of your debt (they get pennies on the dollar by selling your debt to a collector, who’ll try to get you to pay at least something more than those pennies).

This makes credit card defaults expensive to issuers.

On the other hand, if you’re a “transactor,” someone who never carries a balance, the issuer has negligible risk of such losses, while collecting very nice swipe fees each time you use your cards. That may be why issuers like cardholders who use their cards a lot and don’t carry a balance. The Washington Post quoted Brookings Institution Fellow Aaron Klein as saying, “The most profitable customers for credit companies are high-income people who spend a lot and pay their bill on time.”

7 Tips for Using Your Cards without Letting Them Use You

Some people invest a great deal of time and effort to maximize their card benefits. They might use one card for travel expenses, another for Amazon purchases, a third for Costco purchases, a fourth for gas, a fifth for restaurant meals, etc.

Often, they’ll pay hundreds of dollars in annual fees to get cards that pay exceptionally high rewards for a certain category of purchases.

For me, that’s not worth the extra few hundred dollars a year it might net me, nor the risk that I’d be tempted to spend more to get enough rewards to justify those high annual fees. Here’s what I do instead.

Avoid fees

1.       Only carry cards that don’t charge an annual fee.

2.       Always pay card bills on time.

3.       For international transactions, only use cards that don’t charge an international transaction fee (most cards charge 3% for that).

Avoid interest

4.       Only pay with a credit card for things I can afford to pay cash, and pay the balances off in full each month (exception: if it’s a long-term 0%-interest offer).

Get rich rewards

5.       Only use cards that offer 1.5% or more in rewards without limits or rotating categories.

6.       Only get cash rewards, and put them into savings.

Don’t let the reward “tail” wag the budget “dog”

7.       Ignore the reward when deciding whether or not to buy – the 1.5%, 2%, or even 5% reward still means you pay 95% or more on something you may be better off not buying in the first place.

If you want to know more about the best (and worst) way of using credit cards, read this.

The Bottom Line

Credit cards aren’t evil. They’re a powerful tool that can help you set more money aside each year, if you use them right.

Card issuers aren’t evil either. They provide a beneficial service and strive to make a fat profit for doing so. If you carry a balance, they’ll be only too happy to have you pay interest and fees, and they might even try to entice you into carrying that balance. However, their favorite customers are those who generate lots and lots of swipe fees without ever posing any default risk.

Follow my 7 tips above, and you too will be able to grow your net worth by using your cards, rather than letting them use you to enrich card issuers more than you need to. Make your credit cards part of your financial success story, rather than how you spiral down, crash, and burn.

Financial strategy is all about setting financial goals, crafting a plan to reach them, and doing what's needed to start implementing that plan in both your business and personal life. Finding simple ways to turn a potential financial trap into a money-maker can help you achieve your goals. If you'd like to learn what financial strategy can help you accomplish, email me and we'll coordinate a free, no-strings-attached phone call to explore that.

Disclaimer

This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.