And When Not to Use a Credit Card
A credit card can be a dangerous thing. From my experience as a Financial Advisor/Money Coach, a credit card is the cause of many personal financial catastrophes.
User beware! First, let’s look at when you should never use a credit card:
- Never use a credit card if you spend more than you make. This includes those individuals and families who say, “I’m not sure” or “sometimes.” The answer is to track your expenses so you can compare net income to spending each month.
- Never use a credit card if you cannot pay off the balance each month. If you can’t pay your credit card off, you are in financial trouble right now and should declare a financial emergency. Stop reading this article and read “Credit Card Problems? Declare of Personal Financial Emergency.”
- Never use a credit card if you plan to use the card as your emergency fund. This is another recipe for disaster. Set up an emergency fund, the amount depends on your personal situation. Six months bare-bones expenses is a good starting point.
OK, if you survived the above “Nevers,” here is what you should look for in a credit card.
- First, determine the reason you want to use a credit card. Convenience is a common reason, more convenient than paying with cash. Convenient if the charge is more cash than you have with you (like a $720 car fix plus tires charge). Easier to track expenses, a good reason. Cash back is another good reason. Company discounts or perks like airline miles also works. A new, worthwhile benefit is a free FICO score with your Discover, Barclays, or First National Bank of Omaha cards. I use a credit card that provides modest cash back plus no transaction fees on foreign transactions (generally, you get the best currency exchange rates abroad if you use a credit card which has no fees).
- Second, how many credit cards should you have? The answer is no more than one per person. Exceptions: if your family finances are set up as a his/her/joint, one spouse/partner can have two cards, one personal and one joint. If you own a business and that business requires a credit card, then you can have two.
- Third, determine which credit cards are accepted at the places you buy things. Most stores accept most cards, but there are exceptions. Some smaller stores do not accept American Express, probably because the transaction fee is higher to the merchant.
- Fourth, never pay an annual fee for a credit card. Consumer Reports magazine (February 2014) says only 5% of credit cards now have annual fees. Get your card from the other 95%. Select a credit card that fits criteria #1-4.
- Fifth, make most or all your purchases on the card so you can more easily keep track of where your money goes.
- Sixth, after a year or so, request that your credit limit be raised. A higher limit does not mean you can spend more; it is a way to improve your credit score. One important part of your credit score is your level of debt (how much you have spent so far in that month) compared to the credit limit on your card. The lower percentage of debt on your card, the better for your credit score.
One important thing to consider is the safety of credit cards in general (think Target and the 40 million cards compromised). The U.S. uses an antiquated credit card with a strip containing easy-to-steal data. Canada and Europe use a much more secure card with am embedded chip which must have a PIN.
Our problem is the U.S. financial industry which does not want to pay for a switch and wants the merchants to pay for fraud. The merchants, on the other hand, want the card issuers to pay for fraud. So, while they fight, fraud grows. One small thing you can do with your strip card is write “check ID” next to your signature.
The future of credit cards. I hope there is no future for credit cards, because their misuse causes too much pain and trouble. I expect when my 2-year old grandson gets his first job out of college, there will be no credit cards.
Credit cards, which are good for the industry, will be replaced by good-for-the consumer electronic point of purchase devices (smart phones and the like) which will transfer cash already available in your bank (and in other non-bank accounts like PayPal) to the merchant. In addition online purchases will continue to increase. I can only hope. Meanwhile, use your card with care.
How to Limit the Use of Your Credit Card
It seems that everyone has one. Credit Cards. When use appropriately credit cards can be a reliable source to depend on. However when abused, Credit card can get you in to lots of trouble. How can a person avoid using a credit card too much? There are some ways to keep yourself from swiping your plastic too much.
1. Leave Your Card at Home
Take your credit card out of your wallet or purse. Leave it at home in a safe spot. You will still have it in case an emergency comes up. However you won’t be taking it with you all around town.
When urges come up to buy things you can’t pay for the credit card will be at home. You will have to drive home and pick up your card. Most people will change their mind by the time they get home.
2. Wait 24-48 Hours
So you’re in the store and you see that item you just ‘have to’ have. If your credit card is your only option you should consider waiting 1-2 days before buying the items. Go home and think about whether you really want the item that bad.
Decide if you really want to go into debt to buy it. Many times waiting a day or two is all it takes to talk yourself into waiting. If after 24-48 hours you still strongly desire to get the item and you can’t wait then buy it. Make sure you have thought through the process thoroughly.
3. Give Your Credit Card to a Trusted Friend
This is another option you can consider. Make an agreement with a trusted friend or relative to keep your card. Decide when they will give the card back to you, for example if you have an emergency of some kind.
Hopefully you will not want to even ask your friend for the card unless it’s really an emergency. If not, your friend should stand their ground and keep the card unless it truly is an emergency.
4. Cut the Card Up
When all else fails you could cut your credit card up. This may be more of an extreme measure, but one you may have to consider.
Consider living without the card and saving up and emergency fund with cash. Of course you can always call the company up and ask them to send you another card if you truly run into an emergency.
Credit cards require discipline and self control. If you are lacking one or both of these consider some of the mention steps to keep yourself from going deeply into debt. In the long run you will be glad you did.