Credit Cards – Another Tool in the Toolbox
It seems to me that everyone has a different opinion about credit cards. I like to look at credit cards as just another tool in the toolbox to help me achieve what I desire from a financial perspective. There are many that want nothing to do with credit cards and only want to cut them up and stick to all cash transactions. There are also many who don’t know how to use them properly and have way too much credit card debt. I hope to cover my limited knowledge and how I utilize this tool to make my life easier. There is definitely not only 1 right way to use credit cards and those ways that some people view as bad, may be there for the right reasons.
First, we need to cover some definitions that are really important to understand when dealing with credit cards.
- Credit cards are unsecured debt. This means that the money you owe is not tied to any specific item, like a car, or a house. Most importantly this means that the interest rate on a credit card is going to be some of the highest interest rates you can find. On the other hand, if you miss your payment, no one is going to show up to take your things (at least initially).
- Credit cards is using someone else’s money (the bank) and you are making a promise to pay the bank back. What this means to you is that it is not FREE money. You still must pay for that transaction with real money.
- Most credit cards are revolving credit. This means you do not have a fixed amount you must pay every month. Most of the time you will have a minimum to pay based on your balance, limit, and other factors, but that minimum can change month to month.
- Credit cards have a credit limit. This is the most amount of money you can have as a balance on the card before you are not allowed to use the card any longer. Paying off some or all of the card will allow you to increase your available limit (the amount available to you before you hit your limit.
Second, let’s cover some of my basic rules with credit cards.
- Have a plan for each card you have in your wallet.
- Use credit cards as a transactional medium to purchase items you plan to purchase anyway. If you lose this discipline, then commonly credit card usage gets out of control.
- Do not charge money on a card unless you have a plan on when and how you will pay off that money.
- Always have a $0 balance on every card. There are exceptions to this rule that really comes down to unexpected circumstances.
- Only in extremely rare cases will there be a benefit to charge money on a credit card to get the points, miles, or cash back instead of just paying for it normally.
- Lastly, this is extremely important. Configure automatic payments of the minimum payment required on the payment due date. This will protect you from accidentally missing your payment date and therefore, protect your credit without paying the full balance without you thinking about it.
Types of Cards
There are multiple different types of credit cards. Then even within the types of credit cards there are often other categories as well. This may not be an all inclusive list, but I’ll review how I view different cards and where they may become applicable.
Traditional credit cards are usually quite simple. These are from some of the major banks and there is a large collection of various different uses for these cards. Some come with a $0 annual fee and some are quite costly.
There are specialty cards which are typically from various retailers. Many specialty cards have specific incentives to encourage you to shop at their store.
0% over many month purchase cards are similar to specialty cards, but commonly used for furniture, household appliances, etc.
Let’s look at these different card types more in depth
Traditional Credit Cards
There are many companies that do in depth reviews of credit cards and showcase which ones are best for various activities and which ones are better for you based on that information. I utilize info from https://creditkarma.com, https://nerdwallet.com, https://thepointsguy.com, and others as I do research before adding to my portfolio.
Generally, cards can be categorized into the following categories:
- Rewards cards will typically give you benefits in specific categories. They may be groceries, gas, dining, or other similar categories.
- Cashback cards will typically give you a % cash back on your purchases.
- Balance Transfer will give you a 0% interest rate for the initial number of months before they start charging you the normal interest rate.
- Travel cards will commonly give you a good number of perks focused on travel.
- Hotel cards will give you more perks than most general travel cards but are commonly targeted at specific hotel chains and encourage you to stay with that chain.
Within each category of card there are also different levels of cards.
- Standard cards will commonly have a $0 annual fee, but the perks of those cards are also commonly limited.
- Middle ground cards will commonly have an annual fee of around $100. These commonly come with better perks of a standard card. Having an annual fee discourages many people. If we refer to my rules, use credit cards for transactional purchases, and having a plan, this can still work. Understand what that fee is buying for you and as long as it fits in your normal lifestyle choices, make sure you reap that $100 benefit every year.
- Premium cards have even more extreme benefits, but again, you need to make sure that what you are buying with that premium is covered by activities you would do anyway.
Welcome bonuses are another element to the credit card puzzle. These can be very lucrative, but make sure you do your research before diving in head first. Sometime a card will offer 75,000 miles, but you must spend $5000 in the first 3 months. If you followed my blog series, in Step 6, I covered using 2 credit cards for spending. If I know I spend more than $1700 / month or I have a larger expense I know is coming up, I may leverage this time to open a new card. I need to know that 75,000 mile bonus may be worth $750 when used at a hotel I plan to use 6-9 months away. This could offset the $400 cost of the card.
Welcome bonus offers can be nice. This is one of the few times I may suggest to use credit when you don’t need to. If you are 2 weeks away from achieving the bonus and are not quite there, it may be beneficial to spend more on the card to get that value. You must be careful about overspending though. Also, on year 2 you have that annual fee again, but you won’t be getting that welcome bonus. Make sure you review the value of that card for you to see if you should keep or close that account. Also option is to move the tier of the card down from premium to middle ground or to standard. This can help protect your credit report, which I plan to cover in another posting.
What I have in my wallet and how do I use my cards:
Daily spending – Premium Travel card. I use a premium travel card as my main daily card. I don’t spend any extra on it, but I earn “miles” with my every day purchases. This helps me to reduce my expenses for vacations every year. I can use the miles for flights, car rentals, hotels, and other perks. It also provides me a travel credit worth 75% of the annual fee. As long as I am using that travel credit, then I am getting most of that fee back in my pocket.
Monthly spending for bills – Premium Hotel card. This was my starting point for using credit cards as tools. I wanted to cut the cost of vacations down so I would take my family more often. By paying for as many bills as I can with my hotel card now I can almost always pay for 1 or 2 nights of my trip on points and cut my hotel bill in half or less. I also get a free night included every year, so as long as I make sure to use that free night, I get $150-$200 of value back. Last, this card provides $25 / month of restaurant credits, so I make sure to use it once a month at a restaurant to make sure that month is not wasted.
Work and other reimbursements – Middle ground Airline card. I leverage a Gold airline card when I pay for expenses that will be reimbursed by my work along with other organizations I work with. This helps me make sure that I get reimbursed for those expenses along with keeping them separate from my normal expenses. This card also saves me on baggage fees, so I never pay for checked baggage. Lastly it gives me a $100 flight credit, so the card is basically $0 and I get free checked baggage as long as I would travel during that flight credit window anyway.
Business expenses – Middle ground hotel card. I keep any of my side business expenses on a 4th card. This one provides a free hotel night each year which pays the fee of the card, plus it allows me to keep these expenses separate.
0% Interest balance transfer card. This card has a $0 annual fee. I have used this extensively in my plan to get myself out of debt from previous bad choices. I was able to turn $12,000 of credit card debt that I was paying 22% interest on into 18 months of 0% interest at $667 / month. This cost me a 1-time expense of $360. Ultimately, I turned this into a fixed rate loan and saved $2340 and 5 months of payments. If for some reason, I cannot keep up with the $667 / month, I just pay a little less then at the end of the 18 months I go back to the 22% interest with a much lower balance.
Specialty cards are used by a few local retailers to incentivize their customers to keep coming back to their store over the competition. To do that, they provide benefits to their customers to keep them coming back. In this case brand loyalty is king. If you have 3-4 stores you use today on a routine basis, then I would recommend investigating their card to see when it may be beneficial for you.
Personally I have 2 of these types of cards.
I have a Best Buy card which I have used to do a TV refresh for my house. Purchasing 1 TV with 24 months at 0% interest. I can pay off the balance, but at 0% interest, I am not paying extra for waiting to pay off this balance. I took the total amount, divided by 24, rounded up and that is how much I pay every month. This will also help me stay disciplined that while I have this balance, I don’t need to spend money on another TV or electronic toy too early.
I also have a Home Depot card. The Home Depot allows any purchase over $300 to be 0% interest for 6 months. Sometimes they have 12, 18, and 24 months at 0% interest for purchases over certain dollar amounts. I leverage this commonly when I have a home improvement project and want to just absorb the cost over a few months. Because I sometimes have balances and sometimes I don’t, I make sure I get paper statements for this card. This helps me make sure I am paying this bill since it is not every month.
0% Introductory Rate purchases.
Many companies will offer 0% for 24-60 months on larger purchase items. These purchases will almost always end up showing up on your credit as a credit card. These need the most attention. In most cases 0% interest is nice as long as you pay the minimum. If you pay just the minimum that doesn’t mean you will pay off the balance by the end of the term. If you don’t pay the balance by the original end of the term, you owe all of the accrued interest on that card. This can be easily $1,000’s of dollars extra.
My Flooring card – The last time I purchased flooring for my house I leveraged this credit card type. It provided me the option to pay for my flooring over 12 months. During that time I used the extra cash on hand to pay other higher interest rate items while still meeting my payments for my flooring.
My Samsung account – I have been purchasing a new phone every 24 months for the last 4-5 years. This typically comes with 24 months at 0% interest. I view this as just part of my monthly phone payment.
Conclusion and Summary
Credit cards can be great tools to have available to you. The biggest cost is to ensure you have the discipline to pay the balance every month and not rack up extra balances; therefore, interest charges. Before acquiring a new card do your research. Understand the pros and cons of the card(s) you are looking at and make sure they fit into your existing lifestyle. Review each card yearly to make sure you are using the benefits each card provides. If you are not using the benefits and there is an annual fee, cut out the annual fee.
Please comment on this post with any questions or feel free to share your insights you have gained with your personal use of credit cards.