Some people think credit cards are evil — for example, famous debt reduction guru Dave Ramsey is completely against it. Some use their credit cards without giving it much thought. Personally, I think credit cards are financial tools that can be used to my advantage, but they must be used with caution. How about you?
Photo by Classyshot via Flickr
Common Credit Card Mistakes
Before I go in to my philosophy, I’d like share some common mistakes that I observe.
Disregard the Interest Rate
One of the most common mistakes is to disregard the interest rate. Many first time credit card users fall for this. They are enthralled by the high credit limit and the low monthly payment — extremely cool for college students who “need” expensive gadgets now but can’t afford to wait. Who cares about 22% interest and how long it would take to pay off when the monthly payment is only $20. Better yet, you only need to come up with $20 more per month to buy your next expensive gadget.
Disregard the Budget
There are also those who disregard their budget and use credit cards as extra cash. Unfortunately, your credit limit is not your disposable income — it’s not your money. When you use this money and can’t pay the balance off at the end of the month, you’re going into debt, or going further into debt, whichever the case may be.
Using Credit Cards As A Financial Crutch
Then, there are also those who use their credit cards as a financial crutch. Doesn’t have enough money to pay this month bills? Don’t worry, put them on credit cards and worry about paying them later next month. The important thing is to get this month taken care of.
Can you think of other mistakes people are making with their credit cards?
My Credit Card Philosophy
As promised, here is my credit card philosophy:
- Always pay off in full each month. This means you need a budget, or has to have a pretty good idea about how much you can spend so that you have the ability to pay it off.
- Use a credit card that maximizes reward points. My personal preference is to use cash back reward credit card because it’s much easier to reach the minimum pay out amount than a travel rewards credit card. My current reward card is Discover it® card with its monthly 5% cash back and double reward programs; but I have been seriously considering TrueEarnings from Costco and American Express where cash back reward is more consistent.
- Keep it simple. This means having only 2 credit cards that I use regularly and avoid opening too many accounts.
- Avoid store credit cards.
- Schedule my payment well ahead of time. I make payments online via bank transfers so this is very convenient.
That’s it! What’s your credit card philosophy?
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.
I love credit cards because I understand how they work and how they can reward me. If you’re credit savvy, I think they are awesome.
I spend a lot of time traveling for work. Credit cards are not an option. However, my philosophy is to pay them off early, even before I get a bill or reimbursement from a client. This makes sure that I won’t pay interest or fees and gains me tens of thousands in points every year.
I love shopping for birthdays and Christmas with points!
I also love credit cards. I could also live my life perfectly fine if I did not have any credit cards.
What I dont understand when it comes to these people who complain about credit cards is why dont they just stop using credit cards? If they are so evil why use them? If they stopped using them then the rest of us (those that use cards wisely) would get better benefits.
While I’m a huge Dave Ramsey fan, I’m not totally against credit cards. I’m against the misuse of them, in which you’ve covered well the common ones. Credit isn’t debt, but credit leads to debt, if not used wisely.
My family has one card. We pay it off each month, use it for convenience and for airline miles.
I think your philosophy is great and I’m glad to see that you have the discipline to follow through.
In terms of why I like Dave Ramsey’s suggestion is that for the vast majority of people they just can not help themselves. It’s an addiction to some people so why even invite that into your home. (Hope that made sense)
I don’t have any credit cards. It’s sad how many thousands of Americans have had their lives damaged or even ruined by misuse of credit and I don’t want to participate in the promotion of such a harmful product.
@pharmboy – Isn’t it better to deal with the problem by learning more instead of avoiding? Avoiding a problem doesn’t make it go away, learning to deal with it does.
This is a great topic to address!
I used to fall into the group of people who could not effectively use a credit card. Then natural progression moved me into the group that hates credit cards. Now I am in the process of becoming a credit card ninja who uses my ninja like skills to “out-wit” the bankers at their own game! 🙂
Learning to live within one’s means is ultimately better advice than promoting credit card use. The only winner is the credit card company. Even if you pay your card off every month, you will likey overspend thus using up more of your pay check than you would if you had to pay cash for the merchandise up front.
Frank, you could very well be right about the tendency to overspend when using a credit card because of the ease of use. But for me I use my CC for everything I can and enter each purchase in my checkbook. When my CC statment arrives I do a little reconciliation with my checkbook and pay it off in full. Yes, I’m a pseudo bean counter and don’t mind messing with numbers. Using my no annual fee CC I get one to three $25 rewards each month to use on Amazon.com. I love books so quickly put them to use… Read more »
In my over 20 years of using credit cards I paid a finance fee one time and was upset at myself for doing so. I have maybe paid 2 late fees because I simply forgot to pay the bill on time. Typically I would call to have the late fees removed but on 2 occasions I recall them not removing it because they did it previously. One card I got upset and canceled the account after they wouldn’t remove the late fee. The only reason I use credit cards is to get cash back, rebates or free airline tickets. Over… Read more »
For me Credit Cards are plastic money.
I never buy something on credit that I don’t have the “cash” for. It’s just easier than carrying all the bills. My CC is paid off in full every month.
If there is some super duper gotta have it gadget that I want, I save money in my Blow Fund as I will not take it out of any other part of my budget.
Sadly that means I’m currently without an iPod. My first gen Shuffle finally died and don’t have the BF reserves to buy a new one just now.
I think credit cards are beneficial, provided you are in control of your spending. For those of us who tend to buy in bulk, paying through a credit card can help us get great discounts and offers. Most restaurants have tie-ups with credit card companies, and this can also be used to your advantages. If, however, you tend to use your credit card almost on a daily basis, and for things that you don’t really need, you might be in trouble.
I am with you . . .
Further, I say use credit cards, don’t let them use you!
Just like JerryB said, I never buy something on credit that I don’t have the “cash” for. The only adventage of credit card I use is that I don’t have to carry a lot of money with me when I go e.g. for vacation.
My goal is to be truly debt free and that includes no credit cards. Though I understand that it is a tool it is one that I choose not to use. To have a zero fico score is my aim.