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.