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®.