Credit Cards — How to Use Them Wisely

posted by Andrea | 03/16/2011

Do You Use Credit Cards?

If you don’t use credit cards — good for you {especially if you have a tendency to over-spend}. I think using cash is a great budgeting tool and one of the best ways to stay in-control of spending.

However, if you’re like me and use a credit card for every single thing you buy…then listen up!

But before I begin, let me just remind you that I am NOT a trained financial advisor. I’m simply a really frugal girl with a blog…and way too much to say! So, before you take any of my advice, make sure you talk to a “real life” financial advisor.

Also, I want to make it very clear that while Dave and I literally pay for everything with our credit card, we always pay our bill IN FULL every month and have never paid even one penny of interest…ever.


 

OK… so I know there’s a ton of debate on whether or not to use credit cards.

I see this debate on other blogs, website, the morning news, magazines, and even among my own friends. But Dave and I feel that if we can be responsible enough not to overspend AND to pay off our bill every month, then using a credit card is simply a convenience factor that reduces our need to carry around large amounts of cash.

It’s a personal choice that works for us…you have to decide if it will work for you.

image source

How to Use Credit Wisely::

If you DO use credit cards, here a few tips for using them wisely and getting the most out of your credit card experience.

1. Know your Credit Score.

Your credit score can be anywhere between 300 and 850 — but a good credit score should be above 700. You’ll need to know your credit score in order to take out a mortgage or any other type of loan. And if you don’t know your credit score, you can use Equifax to get all 3 of your credit scores for free. {you will have to input lots of personal information, but it’s a secure site}

For more information about your credit score — I really like Quizzle.com!

2. Have a main credit card and a “back-up” credit card.

Dave and I only use one credit card — for everything. This way, we only have one bill to pay at the end of the month and we don’t have to keep track of multiple cards, multiple bills, etc.

However, we do have another “back-up” card {yes, that’s the technical term!} just in case something happens to our main card and because having more than one card is better for our credit score.

3. Close out extra cards you don’t need or use.

Ok, so if you have more than two or three credit cards, it might be a good idea to close out a few of them. Not only will this decrease your risk of identity theft, it will also simplify your wallet! However, before you go out and cancel all your cards, let me warn you that canceling credit cards CAN negatively affect your credit score.

Let me explain…

Your credit score is based on a debt-to-credit ratio. So if you have 10 credit cards, all with a $3,000 limit, you have a total credit limit of $30,000.  And if you have a $10,000 total balance {the average for most Americans} your debt-to-credit ratio would be 33%. ($10,000 is 33% of $30,000)

But if you go and cancel 5 of your credit cards, your total credit limit is now only $15,000 so your debt-to-credit ratio will jump to %66 — which is really bad! Does that make sense?

So what you want to do, is cancel one card at a time, while you continue to make regular payments to reduce your overall balance.  Wait a few months and then cancel the next card. It will take longer this way, but your credit score will be higher.

How to Avoid Extra Credit Card Charges:

Obviously, if you pay your bill on-time and  in-full every month, you shouldn’t have any extra charges. However, credit card companies have to make their money somewhere, and believe me…they’ll find a way!

Here are a few ways to reduce and avoid any extra credit card charges.

1.  Lower your Interest Rate.

I recently heard that the average interest rate is over 14% — and our interest rate is 18%. However, since we pay our bill in full, we opted for a card with great reward options and a high interest rate because we never pay the interest anyway.

If you don’t necessarily want rewards and would rather have a lower interest rate, there are cards for you. Check out cardratings.com and billshrink.com to find credit cards with lower interest rates.

Also, you might even try calling your current company, explain that you are a loyal customer, and ask if they would consider lowering your interest rate. Seriously, this does work!

2. Make Higher Minimum Payments.

Even though your credit card company only requires you to make the minimum payment each month, you can save LOADS of cash by simply paying a little bit more… or making a double payment.

This same concept can be applied to your mortgage as well. We figured it out, and by paying extra each month and making one extra payment each year, we’ll shave 5 years off our 15-year mortgage!!!

3. Avoid Annual Fees.

I’ve never used a card that charged an annual fee…because I don’t think it’s worth it. There are so many other cards that don’t charge an annual fee, and usually the higher rewards that come with annual fees don’t outweigh the fee itself.

image source

Alternatives to Credit Cards:

If you don’t use credit cards — or if you want to stop using credit cards, here are a few “plastic” alternatives to carrying large amounts of cash wherever you go.

1.  Debit Cards

They still have the convenience factor of credit cards, but you can only spend what you have. However, make sure you remember to record all your transactions so you don’t over-draw your bank account.

2. Pre-loaded Credit Cards

These cards look and function just like a credit card, but you have to pre-load them with a specified amount of cash…so they almost function like a gift card. So if you have a tendency to over-spend but hate carrying cash, these might be the way to go.

3. Gift Cards

Similar to the pre-loaded credit cards, you can also buy gift cards to specific stores…and use them as a budgeting tool. For example, if you buy a $50 gift card to Gap, then that’s your budget…don’t spend any more than your $50! You can use this gift card method for grocery stores, gas stations, restaurants, and so much more.  It’s kind of like the “envelop method” just with out the cash!

You can also buy Visa, American Express, and Master Card “gift cards” to spend anywhere. I like using these for vacations because you can load them with a set amount of cash and then use the gift card for all your vacation purchases. If your balance runs out…you know you shouldn’t spend any more!

What am I missing? What are your best alternatives to credit cards?

 

Hopefully this article didn’t offend too many people. My goal is not to persuade you to use or not to use credit cards — that’s a personal choice. However I do hope that I gave you an opportunity to evaluate your current method of credit cards, debit cards, gift cards, or cash and make sure it still works for you.

What’s your opinion? Do you use credit cards or not?

{top image credit}

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19 comments

  1. Mandi @ Life Your Way

    03/16/2011

    We don’t use credit cards for the most part, although I agree with you that it’s a system that works for a lot of people, so I’m not opposed to them; it’s just not how we do it.

    My ideal system would be to start with xxx amount in an account, pay bills and divvy it up into envelopes or separate accounts and then refill it during the month for the next month’s expenses. Because my income fluctuates a lot from month to month and sometimes we’re left waiting on payment from someone, this doesn’t really work that well for us yet. But my goal is to get to that point!

    [Reply]

    Andrea Reply:

    Thanks for your input Mandi — it’s always good to be working towards a goal right!

    Your “ideal system” sounds great, and I love how organized it is. The only thing I would be worried about is losing my envelopes of money {I’ve been known to lose cash quite easily…}

    [Reply]

  2. jodimichelle

    03/16/2011

    this is quite the debate :) I personally preach (if ever asked) that you shouldn’t have credit cards period. We used to have them and also paid them off every month, never paying interest – but although we were able to pay them off every month, we still didn’t have a handle on spending or budgeting.

    It’s been about 5 years since we’ve had a credit card and I won’t be going back to them any time soon. We just had to find out what worked best for us and not having the option to “borrow from tomorrow” (as we coined it when we finally decided to cut them up) makes our budgeting and our want list in check.

    But like you said, it has to work for each individual or household. So although this is what, in the end, we know works for us – doesn’t mean it’ll work for everyone.

    Great discussion!

    [Reply]

    Andrea Reply:

    haha…I’ve never heard the phrase “borrow from tomorrow” that’s great Jodi!
    I know you guys are doing awesome with your journey to be debt free…so I’m glad you found a system that’s working for you. Thanks for your input.

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  3. Karen @ Abundance on a Dime

    03/16/2011

    My own preference is to use credit cards as little as possible. Most of what I’ve read suggests that it will adversely affect your credit score if you don’t have any credit cards at all. I think that’s a real flaw in the way credit scores are calculated (I mean, surely if you can live without borrowing tons of money on credit, and always pay your utilities, etc, you should be a good risk for getting a loan, right?). My dh is a Realtor and has known people to have difficulty getting mortgages if they don’t have credit cards (and these are people who have faithfully paid all their other bills such as utilities, etc). We use our card for one small purchase every month or two (like a tank of gas) to keep it “active”. Aside from that, a cash-only system works best for us.

    [Reply]

    Andrea Reply:

    Yes, I agree the “credit scoring system” is pretty out of balance. I too know people who are so responsible and always pay everything in full and on time…but they don’t have credit cards so their score is really low. Seems like there should be a better way…but so far, there isn’t.

    It sounds like you have a good system using your one card for a few purchases every month and then using cash for the rest.
    Thanks for sharing!

    [Reply]

  4. Ashli

    03/16/2011

    We have credit cards that we use for online purchases for security purposes, as well as a small purchase or two every month to keep our credit score in good standing. As long as you can control your spending, I don’t think they are a problem. On the contrary, credit cards have paid us a substantial amount through rewards by using them wisely. If I am going to purchase a new sofa and the store credit card will pay me 10% in rewards to use their card, I see nothing wrong with taking advantage of that opportunity. The only key is to have the cash in your bank account to pay it in full when the bill arrives.

    [Reply]

    Andrea Reply:

    Wow Ashli, It sounds like you have your system down to a science!
    And I totally agree that as long as you control your spending, credit cards are not an issue. We also get lots of cash back and bonus rewards for using credit cards…and we always have cash in our bank accounts to pay for the items.

    [Reply]

  5. Kim

    03/16/2011

    We went to buy our first home. Because we did not have any current credit (no credit cards) we did not have a credit score (at all). We had some previously, but it had been so long that it dropped off our report. So…we had to obtain a secured credit card and use it for a few months to return those items to our report. We couldn’t believe it! This is the backwards way that credit reporting works. Meanwhile house hunting went on hold. We did not believe in having credit cards, now we have adjusted that thinking. We use our credit card for gas only and pay it off monthly (in full). I’m happy to say we finally did get our home and have excellent credit.

    Note that there are ways to have loans underwritten with rent, utilities, etc. but this is not common practice and not easy either.

    [Reply]

    Andrea Reply:

    Kim, that’s such a crazy story! It’s sad that you could not get a loan, even after faithfully paying all your bills.

    I’m certainly glad you got your home after all… thanks for sharing your experience.

    [Reply]

    Kari Reply:

    The whole house issue is my husband and my concern as well. We finally got a credit card from our bank, but rarely use it. We mainly wanted it because our debit cards have a $1,000 limit and when we were buying appliances it was a huge pain. Our purchase total was like $1,050. Very frustrating. We always pay cash for vehicles, so I’m quite nervous about what we will find when we go to buy a house. We’d love to pay cash for a house as well, but I’m guessing we will end up with a large down payment and then need to finance the rest. We are very responsible with our money and paying what we owe. I agree that the credit system is way off. I’m glad you have your place now!

    [Reply]

  6. Margaret

    03/16/2011

    We put everything we can on our credit cards. We pay off every month, no exceptions – so we only buy as much as we know we can afford. Both our cards offer rewards, so we occasionally get Amazon.com gift cards and other premiums for using the cards, all at no cost to us.

    It’s also easier for me to track just where our money is going. Cash tends to slip away and never get recorded. I can’t escape the credit card charges in Quicken!

    [Reply]

  7. Kristen

    03/19/2011

    We use credit cards, too. Yet, as of yesterday, we are officially debt free (except for our mortgage)! Like you, Andrea, we pay our credit cards off every month. We’ve found it to be the simplest way to pay for our purchases. Besides, it is nice to get the gas rewards and cash back rewards for using our credit cards!

    [Reply]

  8. Laura

    03/20/2011

    I have a credit card but only use it once or twice a month and pay it off. I don’t think using it for everything and paying it off at the end of the month would work for me. I appreciate your opinions and I like to read what works for others.

    One thing I noticed is that your said you can get your credit SCORE from all 3 sites for free. That is incorrect. You can get your credit REPORT from all 3 for free, but you do have to pay $7.95 to get your credit score. I do this every year around tax time so I can see if we rise or fall with our credit score from the previous year. annualcreditreport.com is where I go to get all 3 and pay for our score.

    Thanks for your tips!!!

    [Reply]

  9. Amy

    03/31/2011

    I find these debates really interesting because I flipped from one side to the other. I used to have a credit card that I paid off every month. I really didn’t see the big deal because I was being responsible with it. However, a few years ago, there was a hurricane that hit the area where my payments went to. I was astonished to get a late fee on my next bill. I sent the check right when the bill came but the check did not reach them until after the due date because of the hurricane. They would not take back the late fee! I decided then that I was done with credit cards. We now use debit cards instead but try to use cash whenever possible. We find spending cash hurts a lot more than swiping a card.

    Another note…My husband had no credit score when we were looking for a home. They wouldn’t look at mine because I was going to stay at home with our daughter. We got our financing through manual underwriting and it was not a hassle at all. It takes a few more days to get approved but it took us more than a few days to find the perfect house anyway. If you do not have a credit score, make sure you save payment histories from utilities, rent and such because they will want to see them. It is all worth it to not carry debt just for the sake of a credit score!

    Thank you for your website. I am a new reader and am really loving all the tips :)

    [Reply]

    Andrea Reply:

    Thanks for your perspective Amy!

    It’s good to know that you can get a loan without a credit score {I didn’t know that}.

    [Reply]

  10. Simplify Your Life by Paying Off Debt | Money Your Way

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    [...] it comes to finances, there’s lots of debate about whether all debt is bad, if you should use credit cards or avoid them completely, how you should budget and more. However, I think we can all agree that any debt adds stress to [...]

  11. Erin

    12/19/2013

    I’m interested in how you budget/track your spending using credit cards. I find that I’m much more inclined to buy more when I use a credit card verses when it’s coming directly out of my account.

    [Reply]

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