Disclaimer: Not a financial advisor – just sharing my thoughts
So, credit cards – yay or nay? Given all the trouble they seem to be causing my gut response is no. I know that many of the Financial Independence people like Dave Ramsey, Chris Hogan, etc. would tell you no credit card and to pay for everything in cash. The idea behind this way of thinking is that you won’t abuse what you do not have. Credit cards are a trap. Now, before you roll your eyes, remember that banks are capitalists. They are not your friend. Banks want to make as much money as possible. Think of it this way- Bank of America, Chase and Wells Fargo give tiny interest rates for their savings accounts. They provide interest rates between 0.03% and 0.75%. These rates are insultingly low. Compare these terrible rates to what they charge in interest for credit card purchases. Some rates are as high as 27% APR. They use your savings to make themselves rich. They will use you to get rich if you miss payments or only pay the minimum balance. Learn more about reading your statement here.
Do you hate credit cards?
If you hate credit cards you are not alone. My husband, who really should be writing this blog because he is better with money than me hates credit cards. He prefers to pay cash (debit card) for everything. I am more flexible, but I understand his concerns and agree that he is right, so we have found a middle ground. You can read more about the credit card free life from Rachel Cruze, two families interviewed by Nerd Wallet, a spender who is now watching her wallet and this Forbes piece.
When I was growing up in Zimbabwe, no one in my family had credit cards. My parents paid cash for everything, and they did not believe in loans -their mortgages were paid off decades before I was born.
I am not sure that I ever had a choice in the matter of opening a credit card account. The first week of college banks came to campus, we opened accounts we got credit cards, and that was it.
While I think a credit card free life is probably ideal for most people, I am not sure that it is practical. We recently bought a new car and our credit score mattered. I think the rules are even stricter if you are a black immigrant.
Let us be honest –
Most of us will not stop using credit cards so we might as well learn strategies to use them wisely.
- Do not open a million credit cards. You only need to show that you can pay your bills on time to build your credit history so no you don’t need a credit card from every store
- Closing cards will not hurt your credit score – even if it did- bad credit habits are more harmful than just closing off cards that are burdening you.
- Pay off your entire balance every month
- Pay off your balance on time – the due date is not a suggestion
- What if my salary pay date changes? Simply call your credit company and ask to change your due date. Changing your due date is not impossible
- Do not go over your balance- seriously don’t
- Avoid cash advances. The interest rates and associated fees are not worth the headache
- Do not fall for the 0% APR offers. Very few people actually pay off the balances within the stipulated time frames.
- Do not play the revolving 0% APR game- nothing hurts your credit score quite like revolving debt. Also, that is just stressful.
- Do not spend on things that you can’t afford. If your debit card balance is lower than the price tag for whatever you want to get, then you can’t afford the purchase
- Do let the credit card work for you-
- Save for big purchases and pay for them with your credit card to take advantage of rewards. I pay for flights and furniture with a credit card and pay it up with the savings. We have our cash rewards set to auto-transfer into our fun fund.
- Do use a credit card while abroad because if it gets stolen, it is usually much easier to cancel
- Do get an understanding of rewards available to you – some cards give 2% for every purchase, 3% for groceries, etc
- Do use a credit card that provides insurance for big purchases. In graduate school, I treated myself to an iPad only to have it stolen. Big City problems. American Express protects most purchases for up to 90 days, so I was able to get a replacement