I’m pretty sure I’ve talked about this before, but it’s a pet topic of mine and bears repeating, even if I have. (Besides, I can’t find it, if I did. Feel free to tell me I’m getting old and senile; I’ll forget all about it in a few days.)
More and more I’m seeing financial planning and couponing and general save-money-now sites advocating a lifestyle completely free of credit. “Pay cash for everything!” they shout. “Cancel all your credit cards except for one, and only use that one in a dire emergency!”
I especially like the people who advocate taking that one credit card and freezing it inside a gigantic block of ice in your freezer, so that you’ll have to wait for it to melt to use it (thereby supposedly avoiding impulse purchases). Those people have clearly never 1) shopped online, 2) memorized anything, 3) seen an ice pick.
The fact of the matter is this: Used responsibly, credit not only makes life simpler, it saves you money.
The key word in that statement is responsibly. If you are incapable of using credit appropriately and mindfully, then yes—you need to stick to cash and cash alone. But if you’re really that impulsive about your spending, you have a bigger problem than your bank balance, and should seek help. (Seriously, it’s a very real disorder and I’m not trying to make light, just pointing out that in the absence of a true addiction, there is no reason why you cannot retrain your spending habits.)
Learn and adhere to the following Credit Card Commandments:
- Thou shalt not carry a balance. Never charge something for which you wouldn’t be able to pay cash. Use your credit card like a faster and easier check—to pay for something on the assumption that the money comes out of your account right away. Pay your credit card bill in its entirety every single month, no exceptions.
- Thou shalt not pay an annual fee. I didn’t even realize that annual fees on credit cards still exist, but apparently some companies still charge them. There are 80 gazillion cards out there which are absolutely free. There is no reason to pay for a credit card. Ever.
- Thou shalt not accumulate credit cards. One credit card is probably sufficient, although there are sometimes good reasons to have two or three (I’ll get to those in a minute). But there is no good reason to have half a dozen or more credit cards, even if you swear on your children’s heads that you’re not using them. Yes, I know the nice companies practically begged you to take them. They lower your credit score, increase your chances of identity theft and/or fraud, and generally present more temptation with zero advantage. Ditch ’em.
- Thou shall utilize the right card(s). I happen to really like Discover because I think I make the most money back with them, and that’s what works for me. But there are cards that give you frequent flier miles and cards that give you points towards shopping at your favorite places and cards that give you credits towards all kinds of things. I don’t know which one is right for you. But you should.
Once you have adopted the Credit Card Commandments as gospel, the rest is easy.
Charge everything. That’s right, I said to charge everything. It’s a far cry from putting your wallet in the freezer, I know. Assuming that you’re never carrying a balance (item 1) and you’ve chosen the right card to get the rewards most useful to you (item 4), you’re now ready to enjoy a whole new world—one where you regularly make money off your purchases (or accumulate miles, or whatever) and have one centralized, itemized bill each month. It’s a thing of beauty.
Many of your monthly bills for utilities and phone service and such will allow you to set up an automatic billing to your credit card, as well. Again, you’re benefiting from those purchases both in whatever your bonus currency is as well as in cutting down the number of bills you have to pay. Why wouldn’t you?
Review your bill religiously. When charging so many things, you do have to expend a bit more time and energy reviewing your bill to make sure nothing was charged incorrectly. Most credit card companies have excellent customer service when it comes to straightening out fraudulent or even slightly screwed up charges, so if you do find a problem, it should be easy to resolve.
Also, many cards that have rewards programs cycle through various offers and require that you opt in to individual programs. Pay attention to what’s being offered so that you’re not missing a chance to earn more. With Discover, for example, they often target a certain product type or service and bump those purchases to a 5% Cashback Bonus for a limited time, as long as you opt in.
Maximize your rewards. Many cards give you a few different options for collecting whatever bonuses you’ve accumulated. To use Discover as an example, again, you can receive your Cashback Bonus as cash, dollar-for-dollar, or you can redeem certificates with partner merchants at a higher return rate. Some of them offer twice the return (e.g., a $50 certificate for $25). Always review the available options and consider whether one of the “bonus” methods will work for you. Also remember that getting a $50 certificate for just $25 is the wrong choice if it’s somewhere you’d never patronize or if you should be banking that money rather than shopping for something you wouldn’t, otherwise.
Have only the cards you need. Remember when I said you probably only need one card? Well, there are a few caveats to that. For one thing, not every establishment takes every card. And if you’re a Discover devotee, like me, you know that Discover is the one that smaller establishments, in particular, might not take. So it’s a good idea to have a second card (say, a Visa or a Mastercard) for the places where you can’t use your first-choice card.
For another thing, different cards offer different perks and programs, and maybe you want access to different options. My other credit card also gives me cash back (though not quite as much as my Discover card), but more notably, it gives me an automatic extended warranty on some purchases. So I use that other card at places where Discover isn’t accepted, and also when buying something which I think might need a bit of extra coverage beyond the manufacturer’s warranty.
One last consideration: If you charge a lot of things for business (whether through an outside employer or as someone self-employed), tax time is a lot easier if you have a separate credit card designated for business expenses. Obviously.
Take the “interest-free with no payments” option when offered. This is a bit different than your standard credit card, but related, because it’s still a line of credit. Many retailers offer big-ticket items on a financing program where you get a year or two with no interest and no payments, provided that you pay off your balance before the specified end point. You’ve probably run into this when buying furniture or appliances. Many people will shy away from this option because if you fail to meet the deadline, you’ll be paying all of that back interest while kicking yourself.
Don’t fear the interest-free option! Embrace it! Read the terms, obviously, but consider how much money you can potentially make on such a deal: Take the money you’d be spending (and you have it in cash, because you’re not buying anything you can’t afford, naturally) and put it into a CD for the term you’re allowed to go interest- and payment-free. When the CD matures, pay off the loan, and enjoy the interest you made.
Make your credit work for you. The credit industry thrives and makes its money off of people who cannot control their spending. You’re smarter than that. Getting all the benefits of using credit with none of the drawbacks is easy so long as you’re spending within your means. And you don’t need to go cash-only to do that.
Besides, once you take that credit card iceberg out of the freezer, you’ll have more room in there for ice cream.
Mir, I could not have said it better myself. Using credit wisely requires some self control, but it can be a good thing. My Dh and I are currently shopping around for a new credit card deal. We are also Discover devotees, but are looking for a “fall back” card. Sadly, the deals are not what they once were. We recently noticed that our frequent flyer program stinks…a lot. Programs change, so you have to check on them once in a while.
That is *exactly* what we do, and people look at us like we’re crazy. But, we’ve been using a mastercard that earns us points that can be used towards gift certificates (our favorite is Home Depot), and by April we will have earned enough to pay for the new lawnmower we need!
My family was using a card with great rewards, turning in points to fly to visit family on the other coast or in Europe. Unfortunately the rewards program has just been changed to get rid of the free tickets (guess we weren’t the only ones making it around the world) and all we got out of it was a bag of pistachios from the card company when they announced the changes. Time to start searching again…
So pretty…
So smart…
Great guide! I’ve never understood why you shouldn’t use a credit card if you pay it off each month, plus get free flights.
There’s another circumstance when you need two cards, and I was pretty surprised and caught out when it came up. Last year I was purchasing tickets for a flight from New York to London, but the tickets were not for the person named on the credit card. The airline required a second credit card in the same name for identity verification. Seemed to be a post-9/11 security measure.
Love Discover! I get Border’s gift cards and I can’t remember the last time I spent acutal money on a book. I feel free to get what I want and it doen’t cost me anything. And we get resturant gift cards for our parents at Christmas time. They love it and love knowing that we gave them a thoughtful gift that didn’t cost us anything.
Foodmomiac said it already:
So pretty…
So smart…
I love this! FYI, though, if you DO ever end up with a balance (STUPID STUPID HEALTH CARE), calling around can get you a far better interest rate than the 25% or whatever that you’re paying (I’m using a 6.9% one, I’ve even seen some promo rates of 0%). So transfer balances to a card or to a loan with a better rate and work really hard to get those balances back to 0.
…but if you can’t have a credit card in your wallet without spending more than you’re making, for pete’s sake do without it.
A year’s worth of points-saving can be wiped out by a couple of months worth of interest and/or late fees. Don’t shoot yourself in the foot trying to earn a few bucks.
(That said, we do pay it off monthly and use a Discover card too– and the Sharper Image cards are 2-for-1… and Sharper Image carries ipods and digital photo frames and all kinds of great guy-oriented Christmas gifties. We cash in each November and buy stuff for presents– or for us– with the gift cards. The rules say you can only use one gift card per purchase, but for high dollar items, we’ve found some salespeople who are either unaware of this or are willing to bend the rules to make a sale.)
After years of bad credit decisions, I’m STILL digging out. However, I am down to two balances, both at 0% interest. I’ve been bouncing them around to the lowest interest rates possible and this has saved me oodles. I simply wish I hadn’t dug such a deep hole. But then, I had little choice when my husband lost his job, had surgery, our income was halved, yadda yadda. Still digging, but am aiming to be credit card debt free in another year or so.
Wonderful advice, for those just starting out, or whatever. My internet has been down for two days at work, and I was in Want Not withdrawal!!!
All good points if you ARE going to use credit. But I’ll throw one statistic out there for you. Studies have shown that people who pay with plastic spend 12-18% more each month. So for many couples who can’t live within their budget, getting rid of the credit cards helps them live within their budget. When we stopped using credit we started spending several hundred dollars less each month. I know people think we’re nuts for not having plastic but my answer is simple… I’ll be completely debt free (including my house) by the time I’m 35 (two years from now) with 6 months worth of living expenses in the bank.
Julie: Excellent point, about people spending more on plastic. However, keep in mind that the majority of those folks aren’t following the Credit Card Commandments. If you are accustomed to spending money you don’t have, then yes, using plastic may present a temptation to overspend. My point is only that folks can be in your position (and congratulations; that’s an awesome achievement!) and earning a little back every month.
We have been on your Discover bandwagon for some time now. Coincidental to the timing of your post, we had just decided to switch all our regular monthly bills to the Discover plan. Unfortunately for us, I’ve found that only our phone company will take Discover. Our cable company would take Visa or Mastercard, but all the rest won’t take any credit card payments without a fee. Our Sewer company won’t take ANY kind of payment other than a paper check (or I suppose a bag of cash). I never felt like I lived in the back country, but I’m starting to look for toothless kids playing banjo on the porches! Anyway, I just wanted to whine, but I guess I can disguise this as a PSA by warning people to make sure there aren’t fees attached to paying via credit card.
what about those of us who don’t use credit cards because we believe that credit card companies are usurious predatory bastards, and that we wouldn’t support them even if it meant a free college education for our kids?
I had my credit card in ice in the freezer once. I saw it on Oprah, about ten years ago when she had on a financial guy and gave a list of rules. That was one of them. (And you’re right, it didn’t help online, because I had the number memorized. Duh. But back then not many stores were online.) Also, he said to “visualize the bill” coming before you make the purchase. And to throw away catalogues as soon as you get them. I try to do those things. Today I would include “delete all the sales emails before you open them” because I am a sucker for free samples with purchase and free shipping. We finally got an amazon reward card, and I am not sure what took us so long. The certificates they send us are almost as pretty as you, Mir!
As for seeking out the best rate – this is a great thing to do, but be wary of the temptation to keep closing old accounts and opening new ones to get the best deals. A longstanding credit account helps your credit report, so it’s best to keep at least one card open.
I definitely don’t advocate keeping a card with a bad rate, but wanted to point out that keeping at least one card active in the long term has benefits beyond the APR.
Delurking to ask a question. I am still in college and stumbled across your site through a link, but I love the freebies! I currently have no credit in my name and after trying to get my fiance a cell phone with no credit (they wanted a $1000 deposit), I decided I should get a credit card and use it to buy my gas each month. The point is to keep it simple. Something that I would be purchasing anyway, and I know I can pay off with my current job. My question is this: I’ve heard two different theories. One is that you don’t build credit buy paying off your credit card each month, that you should carry a balance on it. The other is that you should pay it off each month and that does build your credit. I am personally a fan of the second one where I pay it off each month and not carry a balance. I talked to Mom about this and she couldn’t remember how she built credit. And there are so many conflicting articles on the internet about this, I wanted to know your thoughts! I have not picked a card to get yet, so any suggestions you have would be welcome. Please help this college student going on the right track! (and I think I’m supposed to say that you are beautiful and ROCK!)
Tennessee Gal has some great questions. I’ve heard of people who were dropped by their long-time card companies when they zeroed out their accounts each month; besides being irritating and inconvenient, wouldn’t that impact their credit score? It makes sense to me to maintain a fairly small monthly balance to insure continuity on the same card.
Hi there,
I may be the only person that does this…but when I use a credit card, I deduct the charge right away from my check register in Quicken. That way when the credit card bill arrives, I just cut and paste the charges into the Quicken credit card account. “Reconcile” the balance with the statement and write a check for the whole amount.
Psychologically this works for me for three reasons:
1. Prevents me from overcharging because if I don’t have the money in the checking account, I’m just not going to buy it.
2. Painless to write a check for a large amount every month because you’ve already “paid” for it. Your balance will not go down.
3. Gives me the freedom to use my credit card for any type of purchase. (even groceries)
I do think having credit is a good thing. Being Canadian (and having an excellent credit record in Canada) I was shocked when I moved to the States and couldn’t qualify for a credit card right way. It took a couple of years of excellent bill and rent payments and a secured card before we got a proper credit card. So if you have credit…don’t get rid of it.
Also a big fan of the Discover card. Hubby puts tons of business expenses on it, and we pay it off monthly. We have our cashback bonus bucks transferred to our savings account whenever we build up a $100 balance. Makes for a nice vacation fund!
Pat Rock: Great point! These credit card companies are trying to sucker us in so that they can make more and more money off of us with fees and interest. We say NO WAY in our house. I buy very little online and have one card I use there. We use a gas card so that we don’t have to carry that much cash with us and pay it off at the end of the month from our gasoline budget. We found that when we were using our mastercard for gasoline that it was way too easy to use the card for other things, like lunch out or impulse purchases. We always go to the same gas stations anyway so we just got one of their cards. I used to play the games with the credit card companies and got the cash back and other rewards. It just got too difficult to keep up with. Plus, when we analyzed our spending we found that we were overspending just like the statistics posted here — 12-18% more than we needed to be spending. Cash works for us.
I think the biggest thing about using credit cards is the commandment: “thou shalt know thyself.”
In other words, for all the perks of using credit listed above, if you’re at all susceptible to the tendencies of overspending, I’d suggest skipping them altogether. Particularly when you’re in college or not working much, in my experience it’s just SO easy to charge things and then come up short at the end of the month. And then you end up having to carry a balance, which costs you more money than it would have to just pay cash in the first place.
I’d love to be able to use credit, but I know myself well enough to know I can’t be trusted with it. These days, I generally use cash because I tend to spend much less with it than I used to – even when using my debit card. However, I did find a bank that gives me cash back anytime I use my debit card as a credit card so you can still get perks if you look for them!
for Heidi: I’ve had the same Discover card for ten years, paid it off each month, and never been canceled. So it’s safe to pay it off with Discover, at least. I’ve never actually known anyone who got their card cancelled because they used it responsibly. I have a Bank of America Card that’s years old and has never been used, and they faithfully send me crap regularly– including replacement cards occasionally– hoping that I’ll pull it out and start using it.