We can’t live with them, we can’t live without them! There is no doubt that credit card debt is a major problem with the economy. However, it is a useful tool that I feel most people simply do not understand how to properly utilize. Let’s try to shed some light on how you can use “plastic” to your advantage.
A change in mentality
Most people view credit as basically “free” money. They view it as money that they can spend and that they do not have to pay back. Seriously, for many people, paying later is the equivalent as not owing anything. I know so many people that will pay off $1,000 on their card, only to fill it up with some new purchases. In their mind, the credit card has become the bank account. It’s totally psychological, and that’s what the credit card companies want you to think. This is why credit card companies always mail you reminders to use your card for a vacation, renovations, or emergencies, because they want people to think that it’s like a bank account.
The reality, is that it’s a backwards bank account. Instead of accumulating interests, you pay them. This is why you need to completely turn your perception of credit cards on its head. It’s not YOUR money. It’s not yours to spend freely. Once you overcome that mental image of a credit card actually being yours when in fact it’s not (it’s the bank’s), then you are ready to seriously use it in the way that is the most advantageous for you.
Credit cards definitely have a convenience factor, and this is why I use them. Compared to a debit card, it can be much more profitable and secure. Please take a moment to read The Frustrations of a Debit Card to get more insights on this.
Make sure you have the funds in the bank first
Anything that you purchase, even if you are to buy it with a credit card, make sure that you have the money for it. Stop this thinking of, “I’ll have the money later”. You may, or you may not. It’s 50/50. Those aren’t good odds, especially when we are talking about money. Once you start doing this, you will get used to the fact that the credit card is nothing but a payment option, not a “free ride”. This is important to turn your life around and get yourself out of debt completely. Do not spend what you do not have. It’s better to be a bit patient and have whatever you want a little later.
Pay on time & avoid interests
If we are to take the average American family’s credit card debt, which is about $8000, and calculate how much interests this type of debt ensues, we are talking about about $1400 per year. After 5 years, you have paid the equivalent of the actual debt just in interests. This is why, by only using the credit card for purchases you already have the money for, you will always pay your bill on time, and thus never pay a dime in interests. Even if you pay only $10 in interests per month, it adds up and at the end of the day, this is your hard-earned money that is being wasted away. Not caring about $10 is the same mindset about not caring about $1000, and this is why you see these people with mounting debts. Once you understand that even wasting $1 on interest is not in your best interest financially, you will turn over a new page and start avoiding interest like the plague. You can accomplish this easily by purchasing what you know you can pay back right away & paying your bill on time. I’ve discussed how crucial paying on time is in this post How to Have Good Credit, that you may want to read as well.
Collect Reward Points
Since you are using a credit card to pay for your items, even if you pay them in full each month, why not make your purchasing power work for you? There are a variety of different reward options, which varies from bank to bank. I use AirMiles myself. As a matter of fact, I pay $105 yearly to have an option to collect 1 mile per $15 I purchase with my card. I am willing to pay this $105 fee because by using my card to pay for pretty much 95% of my monthly expenses, I gather quite a nice amount of reward miles. I can get myself 2 free vacations per year. I get more than that yearly fee’s worth, which is why I don’t mind paying it. Even if you do not gather enough points for a vacation, you can still get a huge variety of free items ranging from electronics to car rental to movie tickets. Bottom line, you get something in return for using your card. Isn’t this better than you having to give your money away?
Be smart about special offers
Once in awhile, your credit card company will offer you a low interest option to transfer your balance over. As I mentioned in my post How I paid $25,000 in Debt within 18 Months, you can use this to your advantage if you have debts to pay off. Make sure that you pay off your debt before the special rate expires (usually it’s 6-12 months), or transfer it back to another card that offers you a low interest deal too.
You can also use these low interest offers to make money. For example, you get an offer for a 0% APR for 12 months. Take the money and invest it. Then pay it back at the end of the term. You can put it in an ING investment savings account, giving you 4.25%, which would make you about $200 profit on a $5000 investment. This is pure free cash, and you would have it by simply being smart & logical about your finances.
Also, avoid the extra features that the credit card companies push you to have. Such things like more elaborate travel insurance or minimum payment insurance (where you pay like $0.89 per $100 you have on your card). They make a fortune from those features because 99% of the time, people never use them. It’s pretty much the same as if you would send them a check every month for no reason. Don’t give in to their constant pressure for features that you do not absolutely require.
I’m positive that following these tips will help you turn over a new leaf and start making wiser decisions about your credit cards. Once you “play the game” smartly, you will realize that credit cards aren’t all bad and evil. You can actually benefit greatly from credit card usage.
Do you have any credit card tips to share?