Credit cards are incredibly convenient.
A wallet-sized piece of plastic weighing as little as 5 grams (about 1/6 of an ounce), with zero intrinsic value, lets you make purchases of thousands of dollars or more (depending on your credit limit).
According to a fascinating history from creditcards.com, the first recorded instance of using an instrument that had no intrinsic value to represent a monetary transactions dates back to ancient Mesopotamia, 5000 years ago. Back then, it was an unwieldy clay tablet.
According to that creditcards.com history, the first credit card in the modern sense of a wallet-sized card offering revolving credit was Bank of America’s Bank AmeriCard. It debuted in select California markets in 1958 and went national in 1966.
Why We Get Credit Cards
According to The Motely Fool, here are the top 10 reasons Americans open credit card accounts (with, in parentheses, my assessment of each reason).
- To build credit history (good)
- To have a cushion for emergencies (not great, but ok)
- To earn purchase rewards (very good)
- The convenience of not having to carry cash (fair)
- To make purchases I otherwise could not afford (mostly bad)
- The type of rewards offered (good)
- To help my monthly cash flow (good)
- To help manage my budget (good)
- Fraud protection (great)
- Balance transfer/debt consolidation (very good if part of getting out of debt)
A bonus great reason is to to make safe online purchases, where you can dispute a payment if you never get the product or service for which you paid. Better yet, if someone steals your credit card information, most issuers won’t even hold you accountable for the $50 allowed by law.
Credit Card Basics
In a piece I wrote a while back, I detail the basics of credit cards, including definitions of Credit Limit, Annual Percentage Rate (or APR), Minimum Payment, Annual Fee, Cash Advance and/or Balance Transfer Fee, Penalty Fees, and Foreign Exchange Fee.
Summarizing from that piece, here are my 9 tips for using credit cards well:
- Avoid buying with plastic things you wouldn’t buy if you had to pay cash.
- Each month, pay off your balance in full
- Set up payment-due reminders, whether through your card issuer sending you a text message, or using your calendar.
- Get cards that offer rewards that make sense based on the amounts and types of purchases you charge.
- Get cards with no annual fees.
- Higher credit limits reduce your credit utilization ratio, which improves your credit score.
- In general, avoid getting new credit cards more than once a year, since creditors look at the number of accounts you opened in the last two years and prefer that number to be no more than 2.
- Some issuers will close your credit card account if you stop using their card for a year or two, so use each of your cards at least periodically.
- Understand the details of your cards’ APR, fees, and penalties, so you can make informed decisions.
A piece from Jim Katzaman describes how credit cards can be very good for you (and when you might want to stick with cash). His recommendation on what cards to get include:
- A cash-back reward card for your everyday spending
- A card with higher rewards for the category(ies) you spend on most
- A specific store card for the place you shop the most, whether in-person or online.
His recommendation on what to do when you first get your card:
- Right after you activate your new card, set up autopay to pay it off in full each month
- Put a sticker on the card with its benefits so you remember which card to use where
- Put every purchase possible on your credit card, to more easily keep track of your spending.
Rewards, Rewards, Rewards
This is one of my favorite aspects of using credit cards.
A primer from Chris Backe provides a lot of useful info on credit card rewards.
This includes his list of the more common types of credit card rewards:
- Free hotel upgrades
- Priority boarding
- Free Global Entry (a savings of $100 application fee)
- Free TSA PreCheck (by itself, an $85 savings)
- Access to certain airport lounges
- Free checked baggage
- Concierge services (event booking, finding restaurants, etc.)
- Rental car insurance
- Travel protection and assistance
- Travel insurance
- Lower (or preferably zero) foreign transaction fees.
In another recent piece I offered my best tips on how to make money from your credit cards. These tips help me “juice” my savings by an extra 1.5% each year! My tips include:
- Avoid fees
- Don’t pay interest
- Get the highest cash rewards you can
- Don’t buy anything just because of the rewards
Avoiding Credit Card Debt
Credit card debt can cost you big-time.
The biggest costs are interest (obviously), lower credit scores (even if you keep your credit utilization score far below 30%), stress, and the opportunity cost of not having the money to buy things you need and want more than what got you into your debt trap.
A Trap to Avoid
Credit card issuers love high-earners who charge a lot, even if they never pay any interest or fees. However, they don’t mind at all collecting fees if you happen to find yourself in a bind. They even make it seem like it’s “interest-free.”
Don’t buy into that!
A recent “interest-free” offer I got actually would have cost me the equivalent of 9.1% annual interest!
The Bottom Line
Credit cards are incredibly convenient. They’re sort of like financial “power tools.” Like real power tools, they let you do more easily things that would be much harder if you didn’t have them. However, using them without knowing how can be very dangerous. The above will help you know more about these tools, so you can get their benefits without harming yourself.
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. Learning everything you can about credit cards so you maximize your rewards and minimize your costs can free up money to juice up your path to achieving your financial 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.
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.