How to best use credit cards

Let’s be honest: No one made it rich by getting 3% back from a credit card. I doubt any millionaire out there is saying that using their credit cards is the reason for their fortune. No one can say they’ve made their wealth primarily because they learned how to max out all the benefits from their credit card.

People spend 12% to 15% more when they use a credit card vs using their debit card or cash.¹ A few years ago, when paying for things in cash was more common, transactions felt different. When you handed a clerk $300 in cash, you felt much more energy drain from your body than if you handed them $3. Because swiping a credit card feels the same whether the transaction is $300 or $3, it’s no wonder how people spend more money when they use a credit card instead of cash. I’ve seen people who learn this fact, go extreme, and give up using credit cards altogether, but I am not sure that’s the answer. Because we live in an ever increasingly digitized world, it’s hard to imagine that we will even have the option of using cash in the decades to come. So, my thought is: We might as well try to use them in the healthiest way possible and see whether we can use them as a tool without allowing them to push spending habits in the wrong direction.

I find there are 2 extremes: people who are deathly scared of credit cards and people who feel as though credit cards are as essential to life as having air to breathe. Many still feel this need to play the FICO score game and believe that if they have bad credit or no credit, their lives will surely end. Most of you probably sit somewhere in between—I hope—working to use them with a healthy fear of making sure they don’t get out of control in their balances or only using them for rare occasions or select expenses. A FICO score is a 3-digit number based on the information in your credit reports. It helps lenders determine how likely you are to repay a loan, and this affects how much you can borrow, how many months you have to repay, and how much it will cost (the interest rate).²

For those who are drowning in credit card debt, if your credit cards are already out of hand and you need some help figuring out how to eliminate them, it might be the time to consider contacting a company that can consolidate them. This is where a company will pay off your credit cards and consolidate them into 1 single debt that will have a lower interest rate and a specified amortization length for the loan to be paid off, thus, most likely providing you a manageable monthly payment and eliminating your credit cards entirely.

Be careful with these, though! Once your credit cards are freed up, there is always the chance that your behavior could cause you to rack them back up if you’re not careful. I’ve seen many people get into trouble multiple times with credit cards after they used a debt consolidation company, so please don’t fall prey to this!

We’ve found a few different ways to use credit cards where the chances of accidental overspending or the natural result of spending more by using credit cards can be reduced or eliminated. Points are great. Credit cards offer protection. They’re easy to use and have nearly zero downside if they are lost. This is very different than cash where once it’s lost, it’s gone! Using points to go on vacations or pay for Amazon purchases is clearly a win in the direction of using credit cards.

So, let’s run through some resources that we have used ourselves and have heard other people use.

• Credit Karma: If you haven’t signed up, consider it. This is a great resource for people who want to get an inventory of all the loans in their name. It also will help you select loans (not just credit cards) that may be helpful for you to refinance current loans that you have, help you select credit cards, and a few other fun tools.
• The Points Guy: If you’re unsure as to which credit cards are out there that would give you the most bang for your buck based on where you spend money and the lifestyle you live, check out this website! The danger is that you find credit cards that offer points on purchases that you aren’t already making, thus causing you to spend more. Be careful with that! If you don’t go out to eat much but get a credit card that is going to cause you to want to go out and eat more, it might be something to consider staying away from!

When you pay off your credit card every week, the balance never gets out of control, and it will bring your cash positions in your checking accounts down to a more realistic representation of how much cash you have. Credit card balances get high when people think they have the money, and then when the monthly bill comes in, they realize it’s outgrown their cash positions and now they’re in real trouble!

There’s no definitive answer on credit cards being good or bad; it’s all about how you use them and how responsible you are with your spending. Sometimes, it takes us a while to learn this lesson, and that’s OK. If you’ve found yourself with high credit card debt, there are tools you can utilize to get yourself out of the hole. With patience, dedication, and newfound money wisdom, you’ll figure out the right balance for yourself and your wallet.

References

1. Traffis C. Leveling up: why customers spend more when paying with credit cards. SumUp. Accessed November 18, 2024. https://www.sumup.com/en-us/business-guide/why-customers-spend-more-with-credit-cards/
2. What is a FICO score? myFICO. Accessed November 18, 2024. https://www.myfico.com/credit-education/what-is-a-fico-score