Pretty much every financial guru says the same thing about credit cards: They are the bane of all finance!
Ok, it isn’t quite that bad, but almost every financial expert agrees you should ditch credit cards in favor of something a little more…ahem…green. For the most part, I agree that you shouldn’t use credit cards, the main reason being the amount of interest you can give to the bank who owns the credit. However, using them the right way can be very beneficial to your cash flow. Here are a few ways to use credit cards to your benefit and also avoid interest at the same time.
- Use special offers wisely. There are a lot of store specific credit cards you can apply for, Kohl’s, Best Buy, Sears, etc. Most of them have special offers that go with them just for using that card at that store instead of paying cash or using a debit or different credit card. For instance, Best Buy has a 5% back in reward zone certificates offer they continuously run. Kohl’s you get 15% off your order, something which you can even use on clearance items. Sears is similar to Kohl’s. If you have enough discipline and use these correctly you can save quite a bit of money. To give you an example, my wife and I have a Disney Visa Card (remember how much I like Disney?). At the Disney store we get 10% off any order of $50 or more just for using the card there. Since we are huge Disney fans and so are a lot of the people we buy Christmas gifts for, we used this to our advantage during the holidays. We’d buy about $50 worth of Christmas gifts at the Disney store, save 10%, and then pay the balance the next month. We never paid a dime of interest and we still received the special 10% off for using our credit card.
- Use Mileage offers wisely. Again this one takes some discipline, but if you are someone who likes to travel a lot, it can be worth it. The first trick is to do some research to find the card that is going to give you the most miles for the buck. The few that I’ve researched have not been worth it. For one of them, I would have had to spend like $10,000 to get a free plane ticket. No thanks, but your “mileage” may vary (see what I did there?). The next part is where the discipline comes in. Spend as much as you feel comfortable spending on it to build your miles on the card. The trick is to pay it off each month so there is no interest accrued on it. I would start with the grocery bill. For example if you spend $200 a trip at the grocery store every two weeks, use the miles card to pay for the groceries and then go home and set the exact amount spent aside for when the bill comes. That way it is like paying cash, but you are still able to accrue miles toward travel. An even better way to do it would be to set the money aside, wait a few days for the transaction to post to your credit card, and then pay it off then. Most card companies allow you to make a payment anytime you want instead of just when you receive the bill. The more discipline you have, the more you can use the card and pay it off right away. The trick is to set the money aside in your account as if you had spent the money in cash instead of putting it on a credit card.
- Take advantage of promotional and special financing. We’ve all gotten them before. We go get the mail and find a chance to open a new credit card with a promotional rate of 0% for the first 12 or 18 months. Even department stores get in on the offer. Best Buy constantly has large-lettered section about special promos for 18 months if you spend a certain amount anywhere in the store or even 2 or 3 years if you spend an even great amount just on home theater purchases. So what is the best way to make use of these offers? For starters, make sure whatever amount you put on the card that you divide it by the amount of months in the promo period. That way you know how much per month you are going to have to pay on the card to be able to pay it off in the time given without paying any interest. In fact, most department stores who run these promotional financing offers will slap you with a huge interest bill from the date of purchase if you don’t pay it off on time. This is NOT something you want to happen to you. To avoid any complications with this, subtract a month while you are dividing by the promo period. For example, if you purchase something on a card with a promo period of 18 months, divide your balance by 17 months to be sure to avoid any interest charges. Once again though there is discipline involved. For instance, you could put too much money on several different cards and wind up with a lot more debt and monthly bills than you wanted (something I did here). My advice and what I will be doing in the future? Only put as much on a 0% interest credit card as you have in surplus per month. For example, if you have $1,000 leftover after all bills and food/gas expenses in a month, you can put $1,000 on a 0% interest credit card. If you have only $300 extra a month then only put $300 on a no interest card. Why is that amount the limit? Basically, if you fall on hard times it only takes you a month to pay off the card. Easy enough.
Those are the ways that you can use a credit card to your advantage. I cannot stress enough that if you don ‘t have the discipline to use a credit card, than by all means keep it locked away or don’t apply for it. There is no sense in trying these out and going in to debt if you know that you won’t be able to handle it. If you are just starting to gain some discipline and you want to use one of these to help you out, then I would use a regular credit card from a financial institution with a 0% promo rate of 12 to 18 months. Stay away from the department store ones because they will give you that big interest bill if you cannot pay it off in the promo period. A regular bank will only start charging you interest on the balance that is remaining on the card after the promo period is up.
Using a credit card the right way is a great way to take advantage of special discounts, mileage offers, and special financing. However, it takes a lot of discipline to be able to stop yourself from continuously adding to a card. As always, do your research before financing any type of purchase and don’t forget to only keep the amount of money you have in surplus per month on a no interest credit card.