The Moneystretcher’s Guide To Using Credit Cards

Those are staggering numbers, but there is good news. In the past couple of years, these figures have begun to drop slightly, suggesting that Americans are developing a better hold on their personal finances. Whether this trend will continue or not remains to be seen (given the state of things during the pandemic) but indicators are promising.

Still, there are allot of people carrying balances on their credit cards, and that means that there is allot of wasted money being spent on interest. In 2019, the average interest rate on credit cards was 15.1%. We would never finance a car at that rate, and definitely wouldn’t hold a mortgage with such terms. Nevertheless, many people carry large amounts of debt on their revolving accounts, and as a result throw considerable amounts of money away each month.

There are probably several reasons people find themselves in this situation, but there are two main pitfalls that we would like to address.

• A lack of spending control creates balances that are difficult to pay off, and therefore only the minimum payments are being made
• Consumers don’t pay attention to their balances and just have automatic payments set up, putting their wasted money out of sight and out of mind

The history of the credit card seems to suggest that, at least in concept, they were never meant to become an enduring source of financing. In the 1920’s, certain business began to offer arrangements for paying on an account, and by 1950, the Diner’s Club card was introduced. This is widely recognized as the first “credit card” that could be somewhat universal, but the balance was required to be paid off every month.

1958 brought the Bank of Americard (Bank of America) and then in 1966 came Mastercharge (Master Card) followed in 1970 by what would come to be known as VISA. It was around this time that it was discovered that consumers didn’t really pay attention to the interest rates on credit cards, and they really didn’t care (according to Lendol Calder, history professor at Augustana College in Rock Island, Illinois).

And that’s precisely where we are at today. Many people look at rewards, points, miles, and annual fees and gloss over the actual APR of their credit card offer. This can be as high as 36% on some we have seen recently. If you tend to carry a balance on your cards, this should be enough to toss that offer directly into the shredder. But how much of a role does APR really play for cards used the correct way?

The advice we offer is the same you have probably heard before, but it is SO important that we cannot stress it enough. There is never any valid reason to carry a balance on a credit card, save only the most urgent emergencies, and even then, there are better options.

Leave the cash at home

Seriously, who carries money around anymore anyway? Well, aside from a little pocket cash, people don’t usually carry around a wallet full of money. Once cash is lost or stolen, it is usually gone forever. But credit cards offer protection from this. A quick call to the issuing bank can get your card cancelled and a new one sent to you quickly. In a way, this is a sense of freedom. But remember that this freedom can bite you; keep your card close, because it can potentially work for anybody that gets their hands on it.

Credit Cards Can Help You Budget

Using a credit card for most of your purchases automatically creates a workable budget for you, and also serves as a ledger. You can keep track of your spending better with a monthly statement than you can an empty wallet. There is a caveat to this though. Using cash can help some people realize what they are spending better than swiping. Bringing out cash is a revelation to some folks. It depends on your habits, but we still recommend using a credit card for the benefits that it provides. Your monthly statement can serve as a tool to audit what is coming out of your wallet every month. Check it often for things you might have forgotten. Use it for limiting your monthly spending!

Buyer Protection

There are some benefits from using a credit card that just cannot be denied, nor can they be duplicated by using cash. Purchases made with a credit card are usually traceable by the merchant, and if you have lost a receipt, they can often look up your purchase using the card that you provided. Keeping a receipt is still important, but this feature makes it a little more forgiving to lose one. Fraudulent use of the account can usually be detected and most likely taken care of by the issuing bank. Many charges are disputable as well, meaning that if a purchase goes south, you have some recourse.

Perks

For those who are wise and pay their balance in full every month, good credit cards usually cost nothing for the user (we do not recommend cards with annual fees). But they can give back. This usually takes the form of cash back or air travel miles. Cash back is always welcome! Cards will vary greatly in these rewards, so search diligently for the one that best suits your spending habits. Some will give greater bonuses in certain categories, which can help you target your card use to optimize the savings. Some cards will give you points just about everywhere you shop. Wouldn’t it be nice to never pay the asking price no matter where you go? Essentially, up to a certain limit, that’s what you get with a good cashback credit card.

Flexibility

Imagine trying to make an online purchase without a credit card. It may be possible, but not very enjoyable. You could buy online and send payment, but who in the world wants to do that. In this world of technology and instant shopping gratification, the benefits become necessities. Try renting a car without a credit card. Speaking of that, did you know that many cards will automatically cover damages to the vehicle that was rented using the card? Might make you rethink that insurance they try to push on you at the rental office. There are ways to exist without a credit card, but not a whole lot of good reasons to choose this lifestyle. Credit cards build credit, and some day you might need that.

So, how should you actually use a credit card? The rules are pretty simple.

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• Only charge things that you can afford to pay for with cash
• Use only for convenience, not for financing
• Pay off balance every month
• Do not opt for cards with annual fees or high interest rates
• Only carry one credit card with you
• Know the benefits of your card, and use them to the maximum

If you follow these simple rules, you will be able to stretch your money further, all while building and maintaining your credit. Breaking any one of these rules means you are not optimizing the benefits that credit cards have to offer. By all means, don’t be afraid to use your card, but use it wisely. You may just realize that cash is no longer king!