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Is it bad to use your credit card a lot?
Sometimes (often) in the financial advice realm, credit cards get a really bad rap. And for good reason. Most people are dealing with credit card DEBT and that is an ugly type of debt, generally because it’s quite high interest and the growing balance makes people feel hopeless about conquering it. Not cool! But to me, the problem isn’t the card. The key is ensuring we learn the strategic way to utilize the credit card in the greater context of a strong money plan, to really know your numbers and have a practical strategy to stick to them.
A dollar bill is a piece of paper. A credit card is a piece of plastic. Both are tools for buying things. You must switch your psychology to view them the same- both are YOUR money leaving your pocket. Is it easier to spend using a credit card? Absolutely. You especially have to watch out for all those auto-ship, subscription, and other recurring items! And that ease of spending and auto-spending can make them more risky. But I think because of the convenient tool they are in the online world we live (especially during the pandemic when the shift to online shopping really took a leap), it’s not practical to expect to never use them. I believe learning the skills to correctly use credit cards is essential and is a better long term strategy. If we cast credit cards only as bad debt-making cards, they will continue to be bad debt-making cards for people who then only grab them out of desperation (which leads to debt) instead of intentional, skilled, and strategic use coupled to a safer plan for emergencies.
So, firstly, when I talk “credit” cards there is no using of the “credit” part of the credit card. To really master your money game, you have to be a step ahead of the bank. I’m a supporter of taking advantage of the great features of credit cards, but NEVER using them for the intended profit-driven purpose for which banks peddle them. The bank wants you to borrow high interest rate money by just making that little “minimum payment” so you generate some high interest rate debt on which they makes loads of money! Heeeeck no! Never never!
Instead, we must view a credit card as a convenient tool for collecting our discretionary spending transactions (for which I know my monthly cap) that provides me a nice single payment to make each month (one line in the spreadsheet!). So, in other words, the card balance is paid IN FULL every month. I don’t even know what the interest rates are on our cards because I’ve never. paid. interest. A charge against the card is the same as an obligation from my bank account for the following month’s due date- the money must be there. That’s it. Always. No exceptions.
I still feel the financial guru’s (who I totally love and respect!) rolling their eyes at me and perhaps gnashing their teeth a bit. Please don’t start using a credit card if you haven’t already implemented the overall money management strategies, like knowing your 3 key monthly numbers and creating a vision for your life to keep you on track towards your financial goals. Please don’t start using credit cards if you currently have credit card debt. My practical money management point of view, however, is that once the overall money strategy and vision are established, and the debt is tackled, most people can learn the skills to utilize these tools well (have confidence in yourself!), and ultimately reap the benefits while warding off the potential downsides of credit cards. A plastic card should never be given so much power over anyone.
Wondering how to use a credit card for the first time or why you might consider using a credit card for 100% of your discretionary spending? Here’s my list:
1. Tools to analyze your spending habits
Many main stream credit cards offer great online tools to analyze your spending habits by category, including every separate transaction for you to peruse. So, when you’re digging into establishing your optimal discretionary spending cap or reworking it, these automated tools can help you dig into where you might see overspending, remembering some categories you didn’t consider before in coming up with your cap, and generally just help you understand your spending on a monthly and annual basis. So, instead of tracking all these individual purchases yourself, you can rely on your card data to provide the insights for you.
2. Best theft and fraud protection
Cash can get lost or stolen. Debit cards provide thieves direct access to your bank account dollars. Even if the money is restored by the bank, there could be a gap of some days between identifying the fraud and getting the money replaced- very problematic if it was right when your mortgage was supposed to pay. A credit card can simply be deactivated, number changed, and there’s no threat to your money. ‘nuf said.
3. Easier monthly bill management
With a credit card for all your daily transactions, discretionary spending becomes a line item in your monthly account tracking bills spreadsheet. A single transaction to pay and record makes implementing my spreadsheet system extremely convenient, which means you’re much more likely to stick with it!! It’s like dieting- there’s a ton of systems, plans, and options touted out there, but ultimately the simplest one for you to successfully implement in your life ends up being the most effective. It’s not the diet system itself, but rather the success in implementing it and sticking to it. Same with money plans.
Also, sticking to your monthly spending cap requires watching that number like a hawk, especially when you’re making adjustments and getting used to your number. All transactions tallying up on a credit card account kept conveniently in an app on your phone (or logging in from your computer) makes this job incredibly simple. You also are able on some, if not all, cards to implement alerts that can be customized to notify you when you’re at certain dollar amounts, like 50% of your spending cap and 75% of your cap. These notifications are so helpful and make it super simple to note how far along in your card billing cycle (dates you will become very familiar with) you are in relation to how deep into your spending cap you’ve gone. When I was living on $1,400 a month, these alerts were very helpful! Again, making your money plan easy for you will reduce the number of flops you have to recover from on your path to success!
4. Credit score and credit monitoring
I’ve noticed in recent years some cards offer free credit score updates and credit monitoring which are handy tools to have. In addition to checking your report annually for errors and such, you get to see your score on a regular basis and any inquiries to your credit which could tip you off to fraud or mistakes. Keeping an eye on your score can be very motivating if you’re improving your credit worthiness as part of your money makeover- very satisfying to watch it keep going up! Go you!
And last but certainly not least…
5. Free money
This might be the top reason people may bite on a credit card offer- free rewards! But I put it last on purpose. Spending money to earn back a fraction of that money is no reason to spend money! BUT when you are honoring your monthly spending cap, getting 2% or more back on an annual basis amounts to hundreds of dollars. When credit cards are used for a transaction, the establishment charging the card pays the credit card company a fee (typically 3%), so the bank is making money off of your expenditures hand over fist. The cash back and other rewards offered by cards are just a portion of this pie. It’s money on the table that skillful, strategic card use will get you. Stay tuned to the blog for more specific strategic uses of credit cards, including taking advantage of promotional offers and categorical cash back structures.
In conclusion…
Credit cards or not, it is crucial to be intentional about your spending, as part of a broader strategy for your hard earned dollars. The vision you have, the strategy and plan you create- those things must come first. You can build a better life moving the chess pieces of your 3 key monthly numbers around, one of which is your discretionary spending cap. Once you have internalized this approach and carefully watch and honor your monthly spending cap, making intentional adjustments as you go, credit cards are just another tool to help you implement your money strategy. Not an enemy, and also not a lifeline. Learn the game, hone your skills, and use credit cards to your advantage… just never the other way around.