Credit Cards – Use Them Wisely

Credit cards can be a double-edged sword.  On the one hand, they offer many advantages.  For example, they are a tremendous convenience, and allow you to limit the amount of cash you carry.  Credit cards are also easier to use than cash or checks, so they save time and eliminate hassles when making purchases.  Credit cards also come in handy when making online purchases, or booking travel reservations.  “Rewards” credit cards can help you earn cash back, airline and hotel awards, and other benefits.  And of course, credit cards can be very beneficial in an emergency.

But on the other hand, credit card use is full of many dangers.  Credit cards are easy to over-use, and they can get you in over your head in debt.  If you carry a balance on your credit cards, the interest rates can be excessive.  And if you are late on a payment or go over your credit limit, the banks and/or credit card companies will impose stiff penalties.  If you get caught in a cycle of making only your minimum payments, the interest and fees can add up to the point that it’s difficult to ever pay off the balance on your card.  Credit card debt is one of the leading causes of personal bankruptcies, and it’s easy to understand why.

The pitfalls of credit card use are so numerous that many financial advisors suggest that you shouldn’t use them at all.  I’m not willing to go quite so far.  Rather than advising zero credit card use, I am a proponent of using credit cards responsibly, provided you are disciplined enough to do so.  But if you don’t have the self-discipline to use credit cards responsibly, you’re better off to cut them up and use only debit cards, checks and cash.

So what constitutes responsible credit card use?  I’ve listed five points below that I believe represent the minimum requirements of using credit cards responsibly.

1. Don’t spend more money with credit cards than you would if you were paying cash.  There is a strong temptation to buy more when you are using a credit card than you would if you were pulling cash out of your wallet.  Don’t fall into this trap.  Use the credit card as a “method of payment”, not as a way of buying things you can’t afford.
2. Pay your credit cards off in full each month.  This is an extension of point number one.  If you find yourself unable to pay your bill in full each month, that means you over-used your credit card.  By paying your credit cards off each month, you avoid interest and late fees.
3. Use credit cards with no annual fee.  Many credit cards charge annual fees in excess of $100, which is simply ridiculous.  There are so many “no annual fee” credit cards available now, it’s foolish to pay an annual fee.
4. Choose credit cards with a low interest rate.  The interest rate will be a non-factor if you pay your credit card bill off in full and on-time each month.  But in those rare instances where you are unable to make full payment, or you’re late with a payment due to an oversight, you want the benefit of a low interest rate.
5. Use a “rewards” credit card.  If you’re going to use credit cards responsibly, you deserve to be rewarded for it.  There are many credit cards that will reward you with cash back, airline miles, hotel points, and similar benefits.  You should be able to find just about any kind of reward you’re looking for.  Two words of caution though.  First, the knowledge that you’re earning rewards can increase the temptation to over-spend.  Don’t do it!  Second, many rewards credit cards carry an annual fee, often a high annual fee.  But with a little effort, you’ll be able to find a good rewards card with no annual fee.

If you have the self-discipline to follow the above rules, credit cards can be a valuable tool in your financial arsenal.  Be honest with yourself, though.  If you don’t have the self-discipline to use credit cards responsibly, you’re better off sticking with debit cards, cash, and checks.

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