Wednesday, January 21, 2015

Credit Cards Are Not Bad

Cake does not make you fat.  Eating too much cake makes you fat.  It's not the indulgence; it's the over-indulgence.  Similarly, eating too many carrots will also make you fat (though, admittedly it will take an awful lot of carrots).  It's not the cake or the carrots that are bad or unhealthy.  It's going too far, over eating, and overspending your calorie budget that leaves you with those love handles.  

It's the same concept with credit cards. 

Credit cards, like cake, are not innately evil.  However, like cake, credit cards have a bad reputation because they tend to be overused and abused.  This is not the credit card's fault.  The credit card doesn't make decisions.  The credit card doesn't jump out of your wallet and into the hands of the sales associate at your favorite store.  You gave it to her of your own free will.  And there's nothing wrong with that as long as that card is handled thoughtfully. 

Credit cards have their fair share of bad qualities.  They are designed to exploit you to make money off of your poor decisions and bad spending habits.  They come with tempting starting offers, such as interest free trial periods and bonuses for transferring the balance from another card.  And then once you've built up a balance - wham!  You get charged with a diabolically high interest charge.  Where did that come from?  Oh yeah, they call it fine print for a reason.  

But there are some really great benefits that you can get from credit cards too.  They offer flexibility in spending so that you don't have to use cash for every purchase.  They provide a nice cushion in case of an emergency (eg. flat tire and tow truck).  Many credit cards also come with rewards.  These can come in the for of airline miles, hotel vouchers, and cash back - my personal favorite.  

I currently have a credit card that pays me 1% cash back for all purchases with 5% bonus cash back in special categories.  Since this is money that I was planning on spending anyway and did not have stashed away in a higher yielding account or investment, I might as well put it to good use and make a little money on it.  

So if you follow the rules, you can beat the credit card at its own game.  And the best part is that the rules are pretty simple.

1. Don't carry a balance. 
This means that the card needs to be paid off every month.  Completely paid off.  Any money that rolls over could be charged interest.  This is no good.  Compound interest is a powerful ally but and even more powerful enemy.  Don't let anything roll over.  Make sure the balance gets zeroed out at least once a month.

2. Don't spend more than you can pay.  
The credit card wants you to spend more than you can pay.  It gives you an alluringly high credit line begging to be used.  Then all the sudden you are between a rock and a hard place and can't follow rule 1.  

3. Don't forget to use your rewards.  
Forget rewards?  How could that ever happen?  Well you might be surprised.  The credit cards are in the business of taking your money.  Even if they offer it, they don't necessarily want you taking advantage of the freebies.  So, there might be strings or limitations tied to your rewards.  Learn what they are so that you came claim your rewards.  You earned them, after all.  

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