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Think Rich: Use Your Credit Card The Right Way

Charge

I hate to tell you, but that high interest rate you’re paying on your credit. It’s because of people like me.

I was reading about Andreas Bard’s credit card experience. I found a link to the post on Nate Whitehill’s Powerful Posts of the Week and I thought I’d weigh in on what’s good and what’s bad about credit cards.

The Two Camps Of Credit Card Philosophy

  1. They’re evil.
  2. Not really.

First, They’re Evil

Credit card debt has been growing massively over the last several years. The main reason for this is easy credit. Banks have lowered the bar on what kind of income level, credit history, and employment stabilty that’s required to get a credit card.

Ten years ago you needed to show a level of stability and responsibilty to get a credit card. You needed to show that you were a low risk. Today, you just need to show them that you have a pulse.

If you don’t have a lot of experience with money or personal budgeting, it’s pretty easy to get yourself in debt quickly with a pocketful of plastic. And once you get into debt with these little plastic miracles, you have to make a decision. Are they evil. Or did you just let yourself get caught in the money making machine that they are. Choose the latter.

So Two, Maybe They’re Not So Bad

I use my credit card a lot. But I pay it off every month, and I only use it on things that I’d normally buy. I don’t have any tendency to go crazy with the card because I make purchasing decisions based on my cash, not my credit. You always want to be aware of your cash position.

The advantage is, I use the banks money all month while my money is working for me. And then I pay them back at the end of the month. In full. Interest free.

Credit card issuers generally hate people like me because I cost them money. Which is why, if you’re in debt, you have to pay for that cost with a high interest rate. They’re high, mainly because it’s high risk credit. But you get the picture.

Break The Debt Cycle

To take advantage of the good things credit cards have to offer, you have to get out from under them first. Here are some best practices for turning the tables in your favour:

  • Budget. You need to track all your income and expenses. Every month. If you’ve got a paycheck coming in twice a month or every two weeks, then go through your budget that often. No matter how ugly the picture is and how much you don’t want to look at it, you have to. Don’t do it for a couple months and then stop. Do it until you die because no one cares about your financial situation more than you do.
  • Keep one card. All you need is one good credit card. Get rid of the rest, and focus on paying those ones off first. This makes it a lot easier to track and manage your expenses on an ongoing basis. There’s only one bill to take care of every month.
  • Consolidate. Go and get a line of credit from your bank. It’s a lot cheaper than credit card rates and you can consolidate all your debt into one bill. If you can’t get a line of credit, go talk to another bank and explain to them why you want it.
  • Don’t use them. No exceptions. You start to make some progress on paying them off, and then boom, the balance is right back up there. You can’t pay them off if you’re using them. Don’t use them. Like I said, keep one and do nothing with the others except pay them off. If you only have one card, then ignore the “keep one card” rule and don’t use it.
  • Shop consciously. Impulse buying is a killer. Force yourself to stop and make a conscious decision. Do you need this? Can you get it cheaper? Make the decision to leave the store, think about the purchase, and then go back later after you’ve thought it through.

So those are some good strategies. They work. And after you do the hard work, you can take advantage of credit cards and make them work for you.

Either your money is working for you or it’s working against you. There is no middle ground.

Denouement
 

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10 Comments

  1. Excellent post, and thank your for metioning mine even if that one was not written as detailed and informative as yours.

    // Andreas Bard

  2. Hey Andreas,

    Well I wasn’t sure what I felt like writing tonight. Thanks to both you and Nate, I found something …

    So thanks for the inspiration!

  3. I think where most people get in trouble with credit cards, is they don’t keep any cash put away for emergencies. Then, when something happens, and it always does sooner or later, they reach for the plastic. Next thing you know……..

  4. You should have and use more than one credit card. Use one most of the time is fine, but put something on another card monthly. Helps for many reasons.

  5. Credit cards can be extremely useful if used carefully and responsibly. They provide purchase protection and many other perks. Oh, and as mentioned if you pay off in full each month all these benefits cost you nothing!

    - Martin Reed

  6. hmm im just anti credit card ( maybe because im a Dave Ramsey Fan)

    but it’s proven that you spend 17-19% more when you using credit cards rather than cash, so i’ll just stick with cash and emergency funds

  7. excellent post, as usual! :)

    “You always want to be aware of your cash position.”

    totally agree, i always try to “mastercard” what i buy only if i know i’ll be able to pay it at the end of the month. There are certains things though i can’t resist (i’m attending the sobevent.com in chicago in a week, and put it on my credit card…) but i’ll pay it off in no time, asap.

    I usually try to stick with cash, unless i’m buying something online, but then again, i try to use my paypal account as often as possible (confirmed bank account)

    Now why is my bank giving me a 5 grand limit on my mastercard? i asked for a $1500 limit lol

  8. Martin,

    That’s a great point. Purchase protection and the other little incentives that CC issuers give you like cash back, etc are all things you can take advantage of.

    Coop,

    Can’t say I blame you. Like I said, there are two camps. You really have to be in control of your own finances to not abuse credit. But it’s so easy not to think about it.

    And whether you’re pulling in $10k or $10MM a year, doesn’t matter. You have to be aware of what you’re spending and on what. There are plenty of broke millionaires out there.

    Hey Jon, thanks.

    I love Chicago. Beautiful city; been there twice, but they were both hurried visits and I didn’t get a chance to see but a small bit of it.

    And the SOBevent sounds pretty cool. I’m sure you’ll bring some great blogging wisdom back. Just leave that Mastercard in your hotel room before you go for a stroll down Michigan Ave! lol

  9. Credit cards can be an excellent tool to help you manage your finances. But sometimes we make poor choices, or sometimes the events in life take us beyond our expectations and we are left to foot the bill.

    I have learnt things the hard way as far as credit cards are concerned, now I use only my debit card, as long as there is money in my account, I can use them, but regardless whether it is credit cards or debit cards, mostly we tend to spend more.

    Gather together all of your credit card bills and add up the amount that you owe. Get a loan and pay off your credit card bills. If you think that you may still use your credit cards, you may want to hide them away so that you reduce the temptation to use them. As you rightly mentioned, consolidate and pay off your cards. Studies have shown that people who don’t use credit cards, spend less.

    Excellent post mate, very detailed and informative.

    Take care and Cheers.

  10. Robin,

    You make some excellent points. I always see spending on credit to be like drinking too much. Sometimes there’s no way to deal with it except to give it up all together.

    And the only way to enjoy it is to be in control of it rather than allowing it to control you.

    I’m the exception to the studies. I’m always aware of my cash position and I rarely know what my CC balance is until I pay it off at the end of the month. I don’t abuse it because I manage my cash. I’m always thinking in “cash”.


 

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