Wise Use of Credit Cards

As we have mentioned before, credit cards can be a good thing, or they can be a bad thing. If you are one of those people who simply cannot control your spending when you have plastic in hand, then cut up all your cards and use checks, cash, or debit cards. This will limit your spending to what you actually have in the bank. You can still get in trouble if you spend all your money on frivolous stuff, leaving no money for essentials later. But at least you will be somewhat limited on the amount of debt you accrue.

If, on the other hand, you have a handle on spending, credit cards can be very useful. First off, they allow you to easily pay for things without having to immediately deduct money from your bank account. If you pay off the credit card bill each month in a timely manner, it basically amounts to an interest-free short-term loan. But if you plan to build up a balance on a card and then pay only a portion of it each month along with interest payments, then forget about using credit cards. The interest on credit cards can be pretty steep. You don’t want to get stuck making these hefty payments if at all possible.

Here’s what we personally look for in credit cards. REWARDS!! A card must not have an annual fee, unless the rewards paid by the card more than compensate us during the year. Currently, all the cards we own have no annual fees. Also, the card must allow us to pay it off in full each month with no interest or penalties. In other words, the cost to us for the card’s use must be zero, but additionally it must pay us back. In essence, the credit card company should be paying us for using their card. Another feature to look for is the ability to have the credit card company automatically withdraw the total amount due from your bank account each month. This prevents you from accidentally being late making a payment, resulting in interest and late fees. Just make sure you have enough money in your bank account to cover the withdrawal when the bill comes due. We set up monthly reminders on our electronic calendar for this purpose.

Some cards pay back a percentage of each purchase regardless of where the purchase is made. Other cards give rewards based on the type of purchase. Common ones are for gas stations, grocery stores, and drug stores. If you travel a lot, some cards give rewards that can be used for airline flights. Also, some businesses team up with Visa or MasterCard to provide a card with rewards, particularly if you use the card at the business. Some businesses have their own credit cards that can only be used at their stores.

If you look around, you can find some pretty good deals on cards. Here are a few we use that you might want to look at. Please be aware that the description of the rewards we receive with these cards can change at any time. In fact, we have occasionally quit using cards when they change their rewards programs to be less desirable or when better cards come along to supplant them.

 

Fidelity Investments American Express

This is a good general use card because it pays a flat 2% cash back on all purchases. In order to get this card you will have to set up a Fidelity Investments account. The rewards can be deposited into either a taxable account, an IRA, a college savings plan, or sent to the cardholder as a check. However, the full 2% is only available in check form if we let the rewards build up to at least $250. We use this card for all purchases except for those where we get a bigger reward using another card. The one disadvantage of this card is that quite a few businesses, especially small local ones, do not accept American Express cards due to their higher merchant fees.

 

PenFed Platinum Rewards Visa

This card is issued from the Pentagon Federal Credit Union. This account is primarily designed for government, particularly military, personnel. However, we were able to make a donation to an organization that supports military families, and that allowed us to join. You must also set up a savings account with the credit union and make at least a $5 deposit. However, the rewards are well worth it. You get 5% back on pay-at-the-pump gas purchases, 3% on supermarket purchases, and 1% elsewhere. We only use this card at gas stations, supermarkets, and any place that does not accept American Express. Gas companies, such as Shell and BP, sometimes offer credit cards that have 5% rewards on purchases made at their stations, but we much prefer having one card that gives us 5% back for gas purchased anywhere.

 

Discover

Normally the rewards paid by the Discover card are not as large as those from some other cards. However, every few months, special 5% bonuses are offered on certain purchases. For instance, it will soon be offering 5% cashback bonuses at restaurants and movies. One caveat is these specials always have spending caps. We only use Discover when the special offers are better than what we can get with any other card. Points earned with the Discover card have to be redeemed with gift cards. Some cards can be purchased for less than their face value. One of our favorite ways to cash in our Discover points is to get a $50 Chili’s Grill & Bar gift card in exchange for $45 in points.

 

Best Buy MasterCard, Amazon Visa, Etc.

Some businesses offer credit cards that give you substantial rewards for use at their store. For instance, the Best Buy RewardZone MasterCard offers a 4% reward for purchases made at Best Buy and 1% elsewhere. Amazon’s Visa card offers 3% rewards for Amazon purchases, 2% for certain types of other businesses, and 1% elsewhere. Many times the rewards come as vouchers that can be used at their store rather than as cash. However, if you make regular purchases at these stores, that’s as good as cash.

 

Store Cards

Some stores, such as Kohl’s, JCPenney, Sears, and others, offer credit cards that can only be used in their respective stores. Under normal circumstances, these cards generally don’t offer any incentives for their use. However, occasionally the stores will offer sales that can only be taken advantage of when using their card. It can be very useful under those circumstances, especially given that they usually give the discount at the time of purchase. Still, we do not bother with a card from a store we shop at infrequently. Oftentimes a store will offer a steep discount on the entire current purchase for opening a credit card account with them. We sometimes do this if we are making a large purchase and the discount is substantial, but normally we take a pass on these offers.

 

Student Cards

Some credit card companies offer cards that are geared toward college students. They will typically offer rewards on purchases that are of interest to this age group. Our son uses the Citi Forward Card. It should go without saying, but we’ll say it anyway. If your college-age child is not very responsible with their spending, DON’T give them a credit card. BAD IDEA!

 

There are many, many different types of credit cards on the market to meet the needs of essentially every type of spender. We have mentioned only a few that we have found to be useful. For others, check out the Credit Card Guide.

Keep in mind that the deals can change frequently. The rewards we mentioned earlier may not be available by the time you read this. Also, there may be cards available that we would like better, but just haven’t happened onto them yet. Indeed, if anyone reading this finds a great credit card, be sure to let us know about it.

If you use credit cards at a lot of different businesses, you may find that to maximize your rewards, you may need to have a plethora of different cards. This can become unwieldy. Sometimes you just have to say, “No more cards.” Decide how many cards you are willing to keep up with, determine which ones will benefit you the most, and go with just those. If you occasionally order merchandise from Internet sites that you are not totally confident in, you will want to have one credit card with a low spending limit so nefarious individuals who might decide to use the card will be limited on what they can spend.

Speaking of credit card theft, be sure to find out if you are responsible for some amount of money should a card be lost or stolen and then used by someone else. If seems to us that most companies’ cards these days do not require a fee from you under these circumstances. Another thing to be aware of is that some cards cap their rewards. This is okay. Just remember to switch to a different card once you reach that cap because you will no longer receive any rewards on purchases that exceed the cap. And again, watch out for those annual fees and penalties.

Happy credit card shopping. May your balances be paid in full each and every month.

Credit Cards

The use of credit cards is somewhat controversial among financial advisors. Some say it’s best to never use credit cards at all while others say their use is fine. Dave Ramsey, one of my favorite advisors, is opposed to using credit cards because studies have shown that people who use credit cards tend to spend more on unnecessary things than do people who don’t use them. Typically, interest rates on credit cards are high compared to rates for other types of loans such as houses and cars. By running up large debts on credit cards, you can end up spending quite a bit of money just on the interest. So, Mr. Ramsey recommends never using credit cards and, if you are currently in credit card debt, stop using them immediately and begin paying them off.

We personally approach credit cards with the same caution that the Bible recommends for drinking alcohol. Proverbs 23:29-35 says:

Who has woe? Who has sorrow? Who has strife? Who has complaints? Who has needless bruises? Who has bloodshot eyes? Those who linger over wine, who go to sample bowls of mixed wine. Do not gaze at wine when it is red, when it sparkles in the cup, when it goes down smoothly! In the end it bites like a snake and poisons like a viper. Your eyes will see strange sights, and your mind will imagine confusing things. You will be like one sleeping on the high seas, lying on top of the rigging. “They hit me,” you will say, “but I’m not hurt! They beat me, but I don’t feel it! When will I wake up so I can find another drink?” (NIV)

The Bible makes it clear throughout that drinking alcohol is perfectly fine as long as you control its consumption. However, as we see here, if you find that the alcohol is controlling you, then it is time to stop drinking it; cold turkey. We believe the same holds true for credit card usage. If you can control your spending, living within the budget you set for you and your family, then credit cards can actually benefit you. However, if you can’t control yourself, it is indeed time to follow Mr. Ramsey’s advice: cut up the cards now and pay them off as soon as possible.

Some of things we look for in credit cards are: no annual fees, no hidden fees, a 20-25 day grace period for monthly payments, and, most importantly, cash back bonuses. With a card like this, things you purchase will actually be cheaper because you will still pay the same at the store, but the credit card company will give you money back. For instance, we have one credit card that pays us 5% back each month for all gasoline purchases paid at the pump. We have another card that pays us 2% back on everything we purchase. Yet other cards pay us 3% back for purchases made at certain stores. The trick here is that you must pay off ALL your existing credit card debt and then begin to pay off all future credit card charges in FULL each month. By doing so, you will not be paying extra for interest and fees. Rather, the credit card company will pay you a percentage of all your purchases.

Be sure to pay off your credit cards each month ON TIME. If you fail to do so, interest will have to be paid as well as a substantial late fee. Most of the cards we use have a way to set up an automatic “pay-in-full” each month. Once set up, the credit card company will automatically remove your full balance each month from your bank or credit union checking account. If for some reason they are late transferring the money from your account, no late fees or interest are due because it was their responsibility. Of course, you must make sure you have enough money in your checking account to cover the bills when they come due, else you may find yourself facing overdraft fees from your bank and/or fees from the credit card company. Of course, you do not want to set up the automatic draft until you have paid off your existing debts and are ready to live according to your means.

To make sure you have money each month to pay off your credit cards, a budget item entitled “Credit Cards” needs to be added to the items mentioned in the previous post. Then, when a purchase is made with a credit card, the amount of the purchase can be transferred from the appropriate budget category into the Credit Cards category. For instance, suppose you spend $75 at the grocery store using a credit card. You have not actually removed money from your checking account, but you do want to account for the money in the Food category. So, when you next handle your budget, the $75 will be subtracted from the Food category and added to the Credit Cards category. This will let you know that you now have $75 less to spend for Food and, simultaneously, you have set aside $75 for when the credit card bill comes due. If you had used a check or a debit card at the grocery store, you would simply subtract the $75 from the Food category since the charge would have applied directly back to the checking account.

One last thing to keep in mind concerning credit cards. Some places charge a convenience fee when using a credit card. Usually these fees are more than what your cash back bonus pays you. In these cases, it is best not to use a credit card unless its use is truly more convenient and it’s worth the extra fee.

We’ll talk more about credit cards when we get into actually setting up a home budget in a spreadsheet.

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