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?