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Many people think credit cards are bad.
“Credit cards get you in debt.”
“Credit cards charge high interest.”
“Shouldn’t you only use a debit card”?
Like anything, credit cards are only positive or negative in the hands of the user.
There are groups of people who never carry a balance, have the highest credit scores, etc.
These people use credit cards the right way and make their money work for them by maximizing rewards.
They never carry a balance.
On the other hand, there are the people that scare us all.
They have a shopping addiction and continually put expensive purchases on their credit cards, mounting their debt each day.
If you are scared of credit cards, you don’t have to be in the second group.
You can belong to the first group.
The key to belonging to the first group: never carry a balance.
You see credit cards in themselves are not bad.
Carrying a balance, on the other hand, is always bad though.
Here is why.
5 Reasons Credit Cards Are Not Bad
1. Credit card rewards can make you a profit
A credit card like the American Express Blue Cash card can make you an easy $100 just for signing up.
Just for opening a card and putting your normal spending like groceries on the card that you would buy anyway, you get one hundred dollars.
Want your next trip?
A card like the Chase Sapphire Preferred can get you to your next trip for pennies.
The sign-up bonus offers 60,000 points valued at $750.
Where could you go with 60,000 points?
That is a round trip ticket to anywhere in Europe or most parts of Asia.
That could be almost two round trip tickets to Hawaii.
That is two round trip domestic flights.
Without rewards, who would care about credit cards?
We would all be out using a debit card.
Credit card companies had to appeal to the audience of people who don’t carry a balance, don’t pay interest, or never get in debt.
2. Credit cards can offer protection for your purchase
If you just bought an expensive iPhone or will when the new release comes out, you should definitely have your purchase protected.
In fact, you should probably put large purchases on a credit card for the protection.
3. Credit cards increase your credit score
This is not always known, but the subset of people who use credit cards who carry no balance are the groups that have the highest credit scores.
I learned this by being a part of the travel hacking community, also known as points and miles.
You can check out my other blog Travel Points 101 if you want to get to your next free trip and learn more about travel hacking.
Everyone in this community has a credit score of around 850.
When I first started using credit cards and paying my balance in full each month, my credit score did nothing but increase.
It was around 720 FICO when I started, and it went up.
Many people don’t know that paying your balance in full does nothing but increase your credit score.
Why?
First, when you pay your balance in full you improve your utilization rate.
This must be done before the statement closes though.
I will explain later.
4. Credit cards can allow you to make a large purchase with no interest
Credit cards with 0% interest can allow you to make a large purchase interest free.
This can come in handy.
This is only good if you intend to pay the balance off during the 0% interest time frame.
Why carrying a credit card balance is always bad
1. It forces you to pay interest which you should never pay
Carrying a balance is everything negative about credit cards.
It forces you to pay ridiculous interest that will only get you in future debt.
If you owed a small sum this can take years to pay off if you are only paying the minimum payment.
The only exception to this is if you get a 0% card again.
2. It gets you in debt
Carrying credit balances means you are spending money you don’t have.
This is a bigger issue.
I know in the past credit card debt used to be the norm, like a rite of passage to adulthood.
Glad that we live in different times today where most people have a negative association with debt.
If you are not making enough money, maybe you need to address an income increase.
Something as simple as a side hustle could make you an extra $500-$1000 per month.
Our receipt scanning app page can even put an easy $100 in your pocket as well as other things on the blog.
The point is you never want to spend more money than you earn.
It is ok if you are not there yet.
I have been through it all and then some.
Debt is a bigger problem than just spending, but you want to address it.
Though people do better in America today, most people still carry a lot of debt.
Wherever you are at now, you can get somewhere better.
I want to pay off all my debt and be completely debt free.
It is an ambitious goal, but I know I will get there.
You can too.
So, if you currently spend more than you earn or use credit cards for purchases that you don’t have cash for, no worries.
Just start to address your debt.
If you were charging $300 a month on a credit card, next month bring it down to $200.
Keep going until you are only putting purchases you can pay cash for and then get a rewards credit card if possible.
3. It negates any rewards
If you carry a balance, you will not earn rewards.
Any rewards you get will be negated.
You will usually pay any rewards you earn back and then some.
I am sure credit card companies profit from people who receive rewards but are paying more in interest by carrying a balance.
So carrying a balance is always bad
When most people say credit cards are bad, they mean carrying a balance is bad.
You see credit cards are not bad unless used the wrong way.
If you cannot control you spending, you should not have a rewards credit card.
I think you are intelligent enough to make this decision.
I think if you are reading this blog and putting money in your pocket, a reward credit card, when the balance is paid in full, makes your money work for you.
You get money for the purchases you would make anyway like groceries, gas, etc.
How To Have A Credit Card and Never Carry A Balance
So, you should never carry a balance on a credit card unless it is on a 0% credit card that you will pay off.
That means you should never pay interest to a credit card company.
How do you make this work in reality?
1. Only put expenses on the card that you have cash for.
Basically, use your credit card like a debit card.
That means your normal expenses like groceries that you pay cash for, you can put on the card.
Examples of monthly expenses to put on credit cards:
- groceries
- gas
- cable
- car payment
- cell phone
- restaurant expenses
Some people use a service like Platiq to put their rent or mortgage on the card.
There is usually a 2-3% fee.
When going for a high credit card sign up bonus, this will usually be worth the fee.
Sometimes, they waive the fees though.
People who want to maximize rewards or cash back choose this method.
2. Pay your balance as soon as it hits your credit card
Your purchase will usually hit your credit card statement in 24-48 hours.
I like to pay my purchases as soon they appear on my credit card.
For instance, if you put $400 for groceries on your card, the next day when you see the purchase you can just make a payment.
This is truly using a credit card like a debit card.
Be aware of statement closing dates.
If you make a payment after the statement closes, it will effect your utilization rate.
3. Be aware of closing statement dates
Your statement dates affect your utilization rate again.
Even if you pay your balance in full, you can mess up your utilization rate on your credit report.
Let’s say you had a card with $1000 limit.
If you put $800 on the card and the statement closed, the credit reporting agencies would show you have a 80% utilization rate, which is bad.
So, you want your balance to be $0 when the statement closes.
Most people who use reward cards and pay their balance in full have seen their credit score go up.
So, if you had a 740 FICO score, you could probably get past 800.
4. Monitor your credit cards
You want to monitor your credit card activity.
I like to do this at least weekly or possibly more.
Check that there are no false charges and just be aware.
Summary
Most people think credit cards are bad.
Again, credit cards are not bad, but carrying a balance is.
Unless you have a 0% interest credit card, you should never carry a balance on a credit card.
Reward cards are a great way to make some easy cash or get to your next free trip.
They make your money work for you when used correctly.
If you carry a balance on these cards, you are only negating your rewards.
You would pay more in interest than any rewards.
If you have credit cards with balances now and would like to get a reward credit card, I would suggest getting a 0% interest card and having a plan to pay those off.
If you know you will not carry a balance on a new reward card, you can get one of these cards and get something back for the current spending you would do anyway like buying groceries, gas, etc.
If you think credit cards are something that will tempt you to spend money, then forget it.
Whether you have credit card debt, car loans, student loans, the goal should eventually be to be completely debt free, even mortgage free.
It is possible and achievable.
I am working on it myself.
Even if you had just a mortgage but no other debt, can you imagine how freeing that would be?
Reward credit cards are an easy way to put some money back in your pocket.
I think the average person could put at least $1000 a year in their pocket from reward credit cards.
You can beat the credit card companies and reap the rewards, so don’t be afraid of credit cards.
Again, if you are one of those people that are tempted by credit cards, then ignore this.
I think my audience is intelligent and savvy enough to pay their balance in full though.
Do you use any reward credit cards?