Many financially responsible people today avoid using credit cards. This is partly because they rightly believe that one should generally try to stay out of debt. While it’s true that debt can be corrosive if not entered into and managed properly, I hope to show by way of one simple example in this article why financially responsible people should welcome the use of credit cards. A host of central banking and fiat paper money policies have made credit cheaply and easily available to those with good or excellent credit scores, and it makes sense to take advantage. Of course, as always, you shouldn’t take on more debt than you can manage, and when it comes to credit cards, you must always pay off your balance before being charged interest. Interest rates on credit cards are exceptionally high compared to more conventional loans (i.e. 14% vs. 4%), so credit cards are only helpful if you pay them off every month.
High interest rates shouldn’t scare you away, however – as long as you’re paying off your balance every month, you’ll never pay a cent in interest. The first thing you should do after signing up for a credit card is to set up automatic payments to ensure you never pay any interest (easily doable via the online portal). If your card carries an introductory 0% APR (fairly common today), then you should make only the minimum payments until just before the 0% APR expires; otherwise, pay the full balance each month. Also, you should not spend a dime more than you normally do – the idea is to take your normal spending and move it from cash to rewards earning credit cards. As long as you’re going to spend the money anyway, why not get some points, miles, or cash back as well?
With this in mind, let’s just look at one illustrative example. Let’s say you want to buy a laptop for $1,500, and you can afford to save $500 each month. If you follow the conventional Dave Ramsey approach, you’d save for three months, and then buy the laptop with the $1,500 cash you’ve saved. As an aside, I personally respect Dave Ramsey for helping so many people get out of debt, but when it comes to credit cards, he’s dead wrong. There are some who simply can’t handle the responsibility of having a revolving credit line, and these people should certainly avoid credit cards, but for anybody else, it makes sense to use credit to pay for your expenses due to the benefits to be outlined shortly.
Now let’s look at an alternative approach to buying your laptop, and this is just one of many ways to leverage credit cards to your advantage. Rather than saving to buy the laptop, let’s say you instead signed up for the Blue Cash Preferred American Express card and used it to make your purchase (note: the deal I’m referring to has since expired, but is representative of a typical credit card sign-up deal). This card yields a $250 bonus cash back after spending $1,000 in the first three months. The card charges an annual fee of $75, so in reality you’re instantly saving $175 off the purchase price of the laptop. In addition, you receive 1% cash back for all purchases, so in this case that means an additional $15 for a total of $200 in savings. The card also comes with a 0% APR for the first 15 months, so you’d only have to make a minimum payment of $25 per month until you’re ready to pay it off.
The only drawback to this card is the annual fee of $75. Since the card gives 6% cash back at grocery stores (capped at $6,000 annual spend) and 3% cash back at gas stations or select department stores (unlimited), the annual fee might be worth it depending on your spending habits. If the fee is not worth it, simply call the company within the first 12 months and downgrade your card from the Preferred to the Everyday card (which has no annual fee, but also yields less rewards). So to summarize, in this particular case, let’s contrast the benefits accrued via cash vs. credit card:
|Payment terms||Must pay up front||Pay off over 15 months|
|When can you receive your item 3 months later Immediately||3 months later||Immediately|
Now, to be clear, I’m not suggesting that people shouldn’t have sufficient cash stored up for emergencies or to take advantage of volatility in the marketplace when there are downdrafts; however, where possible, it makes sense to use rewards-earning credit cards rather than cash to make purchases. Generally, there are a host of benefits to using credit cards for payment over cash, and here are just a few:
• Protection from fraud
• Protection from unauthorized purchases if card is lost or stolen
• Delay payments (but not beyond the payment period where interest is charged)
• Enhance your credit score, opening up further opportunities
• Rewards such as cash back, miles, or points that can be used for travel
The above benefits are typical for the average rewards card, but those with excellent credit scores can usually obtain cards with added benefits such as the following:
• Protection against damage or theft for items purchased
• Refund of purchases when dissatisfied
• Extended warranty for items purchased
• Travel or car rental insurance
• Global assistance hotlines
• No foreign transaction fees
• Shopping portals with exclusive deals
• Travel portals with discounted deals
Depending on your spending habits and preferred benefits (i.e. cash back vs. travel), the best card for your situation will vary. Hustler Money Blog does a great job keeping track of current credit card deals here, whether you’re looking for low interest rates, 0% introductory rates, cash back, travel rewards, balance transfer deals, etc. Frugal Travel Guy will give you free recommendations on the best cards to use here. The last thing to keep in mind is that each time you sign up for a new card, the issuing company will perform a hard pull credit inquiry, which has a slight negative impact to your credit score. As long as you space out your applications every 91 days, however, you should be fine – for more on the magic 91 day rule, see here.
A lot more could be said, but there isn’t enough space here, and there are plenty of resources freely available online for those who wish to delve further. As always, be sure to do your own homework before signing up for new credit cards, but I hope I’ve demonstrated in this brief space why you should treat credit cards as valuable allies in your quest to make your precious dollars go as far as possible.
Logan Hertz works as a business strategy consultant in Atlanta and freelances as a personal finance expert. If you are interested in clever, easy ways to increase your income and reduce your costs, email him.
© 2015 Logan Hertz – permission to reprint is gladly given, provided the author is given credit