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Some use credit cards for as many of their day to day expenses as possible in order to rack up reward program points. Some even go through a process called credit card churning to earn points for signing up for a new accounts in exchange for cash, airline miles, or travel accommodations. I know people that have taken their entire family on a free, or nearly free, trip by using such methods.
Good for them, as long as they’re using their cards responsibly.
But this kind of “beat the system” mentality is not for everyone. Not everyone has the internal self-discipline to use credit cards for their benefit, while avoiding the potential pitfalls of essentially playing with other people’s money. It’s just too easy to think of a credit card as just another resource to get what you want, and not a loan that you will pay interest on.
So how do you know if you should stay clear of credit cards?
Purchase Justification Part 1: You use an introductory interest rate to give yourself permission to buy something you don’t have the money for right now. You tell yourself that you’ll definitely pay it off before the 0% introductory rate expires.
Reality: If you don’t have the money right now, chances are you won’t have the money to pay for the credit card bill when it comes in the future either.
Purchase Justification Part 2: You use rewards programs to permit yourself to go over budget. Sure, you may be spending a bit more, but you’re earning rewards points or getting cash back!
Reality: Getting 2% cash back on purchases that put your weekly spending 10% over budget is a net LOSS for your personal finance balance sheet.
You Carry A Balance: If you carry any kind of a revolving balance, you are paying interest. You’ve essentially taken out a loan to purchase whatever you’ve purchased.
Reality: Think about this statement: Would you take out a loan to go out to eat, buy groceries, or go to the movies? Sounds silly, but that’s exactly what you’re doing when you use your credit card for these purchases, but don’t pay the balance in full.
I’m talking about this subject today for a very personal reason. Yes, my wife and I racked up $109,000 of credit card debt, and subsequently paid it all off. But that’s not the reason. The reason is because we were on the verge of falling back into the credit card trap.
Earlier this year, we signed up for a store credit card, as well as the Costco American Express credit card, which gives us various amounts of cash back on different types of purchases. After hearing about the success others have had in using credit cards to their advantage, we decided to throw ourselves in the ring and give it a try. After all, we had just paid off a huge amount of credit card debt and had learned our lesson, right? We even came up with a plan to make sure we kept that balance at zero.
Turns out we were completely wrong. We cannot handle using credit cards.
Over the last six months we’ve managed to accumulate a nontrivial balance on that American Express. Luckily, we recognized we were again heading down the wrong path before it got out of hand. We have stopped using and even carrying the card, and then created a plan to pay off the balance. It will only take a few more months, but it will extend past the end of the 0% introductory period. The good news is, according to my calculations, the interest we will pay will not exceed the cash back we have earned.
Most importantly we’ve learned for the second time that credit cards are not for us.
This is just a momentary relapse from all the lessons we learned over the 55 months it took us to dig out of our hell hole of debt. This hole is much shallower, and we’ll recover quickly with no real dollars out of our pocket. Some can handle credit cards, some cannot. A person has to realize their limitations, and it is now etched forever into our brains that we cannot.
Let’s hope we don’t have to learn this lesson a third time.
Are you able to handle using credit cards to earn rewards, or have you come to the conclusion that you simply should never carry a credit card? Have you ever had to learn a financial lesson more than once?
Exactly why I don’t think we will jump back into credit cards anytime soon. I don’t think we have the discipline yet or maybe ever. It’s too easy to fall back into old habits. Glad you caught it early and are address it. Good luck!
Everybody is different, but since our stories are so similar, Brian, maybe you can use my experience as a little extra word of caution. I think I’ve seen the last of credit cards in my day to day life. Good riddance!
I shared this story with my family last night. I timely reminder for us. Glad you go it on lock-down.
Perfect, Brian….being so close to being debt free this is a great thing for you and your family to keep in mind – your work isn’t done once that last payment is made! Always glad to hear from you!
I completely agree with you! I cringe when I see the 30 posts per week from personal finance bloggers advising their readers to “churn” credit cards. The truth is you have to take out tens of credit cards to fund a vacation. Churning credit cards is like running a business. It’s not for 99% of people out there.
I certainly admire those that can successfully do it, but as you mention not everyone is cut out for it. I don’t think I’ve got the motivation to do credit card churning anyway. 🙂
Smart you recognized your old patterns and put a stop to it. I go both ways with credit cards. When I’m comfortable and making a nice chunk of change with freelancing, I’ll use my credit cards, and (since years ago) I’ve never had a problem paying off the balance each month, nor have I purchased things I didn’t have the cash for. But since I hit my slow down this summer, credit cards have been off limits. I just am being super tight with spending and want to know I have the cash to cover what I need to. The (sort of) good news, is if the shit really hits the fan, I can cash in my rewards points for cash instead of the airline miles I was going to use them for next year for Croatia. Hopefully it won’t come to that, but it’s nice to know there is a little buffer.
That’s great that you can cash your miles in for cash, Tonya…kind of like a little savings account of sorts. Hope they don’t expire! 🙂 I don’t think I could go back and forth with credit cards……we found a system that works with cash for our budget – we just need to stick with what works. Great to hear from you, my friend!
Great self-analysis Travis, and glad you caught yourselves in time on Costco American Express. Card issuers are incredibly clever at creating highly seductive offers to suck people in to debt. Clearly they wouldn’t be making such offers if they weren’t making big money on them, so their experience tells them enough people will overextend and pay interest and fees to make the offer lucrative, for the card issuer.
It is critical to acknowledge honestly whether we can handle credit cards. But even for those who correctly assess that they can use a card responsibly, they’re still vulnerable to the unexpected–a layoff, temporary disability, major home repair, car breakdown, etc.–that could cause a credit card balance normally paid off monthly instantly to become a high-interest loan. And who among us isn’t routinely hit by the unexpected?
That’s a great point, Kurt…..They wouldn’t offer rewards if they didn’t make money on it in the long run of of people like……well ME. People that rack up more debt to get the cash back, and then end up paying more in interest anyway. I do believe that identifying that we just cannot handle using credit is a huge step. Stick with the system that works, and don’t worry about those reward programs. Thanks for your comment!
Good for you. I read too many PF blogs and the ‘games’ that folks play with CC’s. It’s like playing with a snake: eventually you will be bitten (note: I’m a big snake fan and have *yet* to be bitten but I know it will happen one day).
CC are risky. Playing with debt is risk. Many people have great intentions but life happens and then they wake up and are in serious debt again.
You will never retire a millionaire by playing the CC game.
Rock on!
I know all about good intentions, Allen…..the road to financial ruin is lined with them. 🙂 I’ve been bitten by that snake twice, never again! I’m a conservative kind of guy, from here on out I’ll go with what I know works, and just keep moving forward. Thanks for reading!
Even though I use my credit card for points and rewards, I stay away from the churning credit cards game. I just have one credit card and I’m happy with just keeping track of the one. Churning seems too much of a hassle for me and a way to just try and game the system. No different than people who try and game the Wellfare system.
It sounds like CC churning does take a fair amount of amount of energy. I think those that do it successfully honestly view it as a game, and once they get a free trip they “win.” Good for them, and that’s probably the state of mind required to make it happen….I just don’t have it in me. 🙂
I’m with you, Travis; credit cards are not for me either. I can’t wait till my credit card is paid off…all this interest I am paying is driving me crazy!
I know exactly what you mean, MacKenzie…..I lived it for YEARS. I never want to see another credit card statement that says I’m paying interest. Like my good friend Steve says…..Pay attention, not interest!
I’m glad to hear that you have identified the problem and are fixing it. It almost sounds as if there is an addictive or, at least, triggering component for you. You have paid off over $100k in debt so you must be good at tracking your spending and accounting for your expenses at the end of the month. Why does using a cc change all that?
Perhaps it is an excuse to allow yourself to carry a balance? Rewards or not, I will never carry a balance again. I did that years ago and it took some time to pay off my credit cards. Now I have my balances debited directly from my checking account at the end of the month, so you’d better believe that I track, weekly, how much I’ve spent and make sure the money is there to pay off the card. For me, a cc is more like a debit card – but with rewards. You get rewards just for purchases, so you can get them without carrying any balances.
But at the end of the day, you should do what works for you. And 1 or 1.5% cash back is not enough to risk your new-found financial freedom.
I think I know exactly what it is, Scooze…I think it’s a lack of being “forced” to pay the full balance. When we were on our DMP, we had a big payment we HAD to pay. We didn’t have lines of credit, so we HAD to pay cash. Now we have the freedom to use credit, and I have the ability to pay the balances off, but nothing is forcing me to do so – all I’m forced to do is pay a minimum payment. Which is strange that I don’t have the internal drive to just do it myself…..I can get up at 4:15am every day to go workout, but I can’t force myself to pay the money I owe? It’s enough to make a guy a little disappointed in himself, but as long as we have a cash based system that we know works, it’s all good!
Credit cards are definitely not for everyone. A close friend recently got one and it didn’t go well for her. I had to coach her and give her tips to pay off the credit card debt she had accumulated.
It’s good that you were able to help your friend, Michelle…..in our case I’m glad we had our previous experiences and success (of paying off debt) to draw from to realize the situation and stop the bleeding before it became a real problem. I’m hoping that by sharing this story maybe others reading will realize credit cards may not be for them as well. Thanks for your comment!
I’m sorry to old habits reared their ugly head but I am so proud of you and Vonnie for recognizing it before it got out of control. I’m not big on credit card churning because the number of people who can do it responsibly (i.e. not create debt) is unfortunately small. It works great for those who can manage it responsibly but it’s catnip to others. As you said, some people and credit cards can’t co-exist well and it’s better to accept that than create new debt. I’ve certainly seen it with some of my clients. Some can use their CCs responsibly and others have to tuck them away.
It definitely reared it head, Shannon….as soon as we identified that it wasn’t going in the right direction, I remembered what it felt like to be sitting at my computer desk (the same place I’m sitting right now typing this comment) wondering how we were going to make the next month’s payment. I never EVER want to be in that position again!
I am so proud of you & Vonnie for recognizing what CCs do to you. They certainly can be addicting. I am one of those that do the credit card churn. However, part of my weekly budget work is checking the on-line statement and then inputting & deducting the amount on my checkbook register, so I have enough to pay it in full when it is due. Since I rarely use them (I have 2 – one for gas because I get 5 cents off per gallon when I use it and my AmEx that I charge as much of my monthly bills on because I get cash back at the end of the year) for anything other than gas & monthly bills, I have been fortunate when doing this churning.
MY trigger is the cash back and discounts with Kohl’s and (now) Macy’s & Sears. When I clothes shop and use those cards, I end up skating on thin ice & getting overwhelmed. Thankfully, I have enough wiggle room in my budget and checking account that I haven’t had to carry a balance. Plus, the returns (“what was I thinking when I bought this?”) help.
Funny you should mention using one for gas…..that’s one of the reasons we got the AMEX through costco because we get 4% back on gas (as a small business owner – yes freelance writer IS a small business!). In the end though, we’re probably giving up at most a couple hundred dollars a year by not taking advantage of the cash back. Is giving up those couple hundred bucks worth staying on budget and not paying interest? Absolutely!
No shame in owning that! At least now you know and won’t be tempted by all these offers thrown your way!
I’ve gotten in the habit of tearing up any and every credit card offer that comes in the mail…this one caught us a bit off guard because it was offered during our Costco membership renewal…..that’s what happens when you make an impulse decision I guess. Although, USING the card over the last 6 months has been anything but a series of impulse decisions – time to get the scissors and do some cutting!
So glad you were able to catch it early, Travis!
You may want to edit this statement, or there could be an even bigger price to pay!! “Yes, my wife racked up $109,000 of credit card debt, and subsequently paid it all off.”
You guys really do ROCK!
LOL, thanks for pointing that out, Sassy mamaw….I fixed it up – good thing Vonnie didn’t see that, BIG Trouble brewing!!! 🙂
It’s great that you learned (and recognized) this early on! Credit cards really aren’t for everyone, and it’s important to know where you stand on them. If the temptation to buy is too strong, they’re better off not being used. Nothing wrong with that.
I wonder how many people actually determine they just shouldn’t use credit cards, Erin. There seems to be a sense of entitlement with credit card holders that if they have one, they should use it…or they’re more “grown up” if they use a credit card. We need to break that mentality that it’s “cool” and “adult” to use a credit card. It’s a tool that can be used for good, but it can also be abused. Just like driving a car, drinking alcohol, or owning a gun. If you are irresponsible with them, bad things can happen!
I think it’s great that you realize your own struggles with credit and are strong enough to avoid it from now on. So many people never do!
Thanks Holly….like I said, we had to learn the lesson twice…hoping to NOT have another relapse down the road. Hopefully I can keep this experience in mind the next time I feel the urge to try using credit cards again. 🙂
We are in the same boat, Travis. I just know that churning and all that stuff would never work for us. Good for you guys for recognizing this early and getting out of the mess before it becomes another 4 year journey.
I couldn’t imagine going through another 55 months of paying off a huge chunk of credit card debt. I just cannot let that ever happen again – we’ve worked TOO HARD to get where we’re at! Thanks for reading, Laurie!
Credit cards certainly are not for everyone. I would agree with that. It took me some time to get used to carrying them and swiping them again. After that, I am comfortable with them, don’t carry a balance, and don’t spend more than I would with my debit card.
I don’t think I’ll ever get used to carrying them, Grayson….it’s just too easy to let go of the reigns of control of our finances. Better for me not to tempt fate. 🙂
I have a feeling that this is how I will be too, therefore I do not plan on trying to use CCs again after I get myself out of debt.
Glad you’re able to recognize the possibility, Kayla…..if you ever think you can handle it, remember my story – if it feels like it may happen to you, just don’t even start. 🙂
Debt is a kind of addiction, and your story is a clear example of that fact. It was brave of you to share your experience. I feel, as someone who has struggled with debt – though not with credit cards in particular – and as someone who recognizes societal encouragement and enabling of debt, it’s a powerful move to stop using credit cards – even better to cut them. I think that credit cards are symbolic of debt in our time. Just as marijuana is considered a gateway drug, credit cards can be considered as gateway debt. Cutting credit cards, or refusing to use them, is a way to take a stand against debt as a whole – both personally and publicly. I didn’t start off this comment with the intention of getting so serious, but there it is. Thanks for a really fascinating post.
Great comment Prudence – there certainly can be an addiction to the feeling you get when buying new things. Speaking of Marijuana…..I had some friends in college that used it, but I never did. I told them straight up that if they used it, that was their choice, but they can refrain from asking me if I want to partake because the answer is NO, and will always be NO. Funny thing is, they respected me for being up front and solid in my answer and never did ask me, nor did they give me a hard time for not wanting to do it. Right here, right now, I’m taking the same stance against credit cards. NO. Not going to use them. The risks are too high, the consequences too great.
I hope you get the same respect for this decision that your college friends gave you. Here’s to cash and debit!
I would expect to, Prudence, given my reasons. Although to be honest, it doesn’t much matter to me – I know what’s best for me and my family at this point. As long as I’m at peace with my decision, that’s all that matters!
What can I say? I know we can pay off any credit card purchases we make every month but it would mean we are a month behind. I’m trying to get ahead and build net worth, not maximize credit card points.
Credit cards are definitely not for me. It’s against my religion (listen to my podcast Ep135 to understand why).
I hope everyone reading your post is a little more aware of the dangers of credit and will think twice when pulling out the plastic from their purse/wallet.
I love that perspective, Steve – making a credit card payment means you’re a month behind, and you want to get ahead. That one’s gonna stick in my head!
“Would you take out a loan to go out to eat, buy groceries, or go to the movies? Sounds silly, but that’s exactly what you’re doing when you use your credit card for these purchases, but don’t pay the balance in full.” Excellent point Travis! So many, myself included at one point, don’t think about this at all. You are taking a loan when you’re not paying it off in full each month. So, I ask myself would I take out a 20-30% loan so we can enjoy a meal out we don’t have money for – of course not.
That said, kudos to you for the self-analysis and knowing to put a stop to it. While I do use cards and use them for rewards, they’re certainly not for everyone.
I’m nodding my head vigorously at your addition to my statement that the loan could be 20-30% just to enjoy a meal out….totally NUTS!!! Not doing it anymore!
Whenever I’m tempted to try credit cards again for the points and/or miles I remember something Dave Ramsey said “I’ve never met a millionaire who became a millionaire with credit cards points/miles.”
Credit cards are a money tool for some, but for me they are off limits – just not worth the risk.
The more I hear about Dave Ramsey, the more I like his perspective, Den. Love that quote…thanks for sharing!
I’m proud of you for recognizing your no go zone. What if that had happened thousands of dollars later?
Then we’d be digging longer….I’m done digging, I wanna build something instead!!!! Thanks for stopping, Michelle!
So far I have been able to keep myself in check. I think a lot of personal finance bloggers – myself included – push credit cards on the masses because we get a fat affiliate check. It’s true they CAN be used in a way that makes it the same as if you were using cash, but there is probably millions upon millions of Americans alone who should never get one or should get rid of the ones they have.
I can see how the affiliate income could push people in that direction. 🙂 I think there should be MORE than just a financial application – there should be a background check and a personality test. I’d fail for sure…and I’d be HAPPY about it!
NOOOOOOOOOOO!!! Come back to the light! Stay out of the eternal credit card abyss!
So glad you were able to recognize the same behavior patterns before things got out of hand. I’ve never been a big fan of those who encourage people to get cards just so they can earn rewards. It’s way too easy to end up in deep trouble before you even realize what’s going on.
Stay cash only baby! It’s the only way to go!
I strayed a bit, Jason, but I’m back..I’m RUNNING towards the light!!! 🙂
I’m with you on the use of credit cards. I went back and forth for a long time but finally decided a few months ago to cancel out the one I was using. I never had a problem with having a balance, but I did have a few late fees at different times from forgetting to pay. I ultimately decided that I’ll never get rich from credit card points. I enjoy mentally being in a better state knowing that I have no forms of credit!
Good man, Trent….I’m happy to hear you’ve learned your lesson and decided to take action. I’m heading in that same direction!
I love it!! We got rid of our credit cards a few years ago.
I despise owing anyone money.
I don’t care what rewards, benefits or perks they dangle in front of me. What they have is not worth the feeling of freedom that we have.
We are completely free (including our home) and intend to stay that way!!
I envy you, Ray….mortgage free and everything – love your perspective, and love where your finances are at. I’m working to be like that as well – thanks for sharing!