Credit cards can be a very polarizing topic when discussing personal finances. There are some out there that swear they will never own a credit card and there are some who solely use their credit card to pay for as many expenses as possible. Today, we will break down our view of using credit cards responsibly.
Establish a Solid Financial Foundation First
First, it is important to note that we believe you should not be focusing on credit card usage if you are currently struggling with your monthly bills. Whether you have a large amount of debt outstanding already or if you have issues with your monthly budget, we feel these items should be a bigger priority than if/how you should be using your credit card.
We have resources on the Impact of Debt and Budgeting 101 that will help you build a solid foundation. Once you have a solid financial foundation, we believe you can explore the use of credit cards.
The Golden Rule: Pay Your Balance in Full
It is our belief that today’s high interest rates make it dangerous to rely on credit cards to afford to cover your expenses. We strongly believe that if a credit card is going to be used, the balance should be paid off before the end of the month and before any interest is charged.
Our firm’s belief is that if you cannot afford to pay in cash, you should not be charging it to your credit card. This is because the annual interest rate on credit cards can easily make expenses 20-30% more expensive. Credit Card debt is one of our least favorite types of debt to see for a client, so we want to make sure the balance on these cards is always paid off.
Building Credit: A Responsible Approach
One of the top reasons we hear people using credit cards, and actually why I got my first one, is to help build credit. While in college, I had a credit card with a small limit of a few hundred dollars, and I only used this card to pay for gas. I would charge $20-$50 per month on the card and always pay it off immediately.
This recurring balance repayment allowed me to start building credit as soon as I turned 18. The small cap on the card was also there to protect me from overspending and paying off these small charges proved that I was responsible for making ongoing payments. This helped build my credit as I desired to buy my first car in the near future. Credit cards are one way to build credit, but once again, you need to be responsible and diligent when paying off the card balance every month.
Understanding Credit Card Rewards and Benefits
Next, credit card providers want you to use their cards since they can charge a transaction fee to the business taking payment. So whether or not you are charged interest, the card issuer is making money every time you swipe (or tap) your card.
To encourage this, issuers offer attractive benefits or rewards. These will vary from card to card and may range from cash-back benefits to travel rewards or even free subscriptions. Even the basic cashback benefits could be nice and could give you theoretically a 2.5% discount on every transaction in the form of redeemable cash back.
Once again, we want to stress that we believe that these benefits will not outweigh the interest that may be charged, so if you use the card, pay it off every month to prevent that high interest.
Annual Fee Cards: Are They Worth It?
Some cards offer even more attractive benefits if you are willing to pay an annual fee for the card. Choosing these cards is very situational. Some travel cards will give you travel credits, point multipliers on booking travel, and so on. But if you never travel, then paying the annual fee for a card like this may be useless since you would never utilize the travel benefits.
For example, Delta offers attractive travel rewards on its credit card, but if you always choose the cheapest Spirit Airlines flight, then paying for a Delta credit card would not be the best option. There are many resources online to browse credit cards, such as nerd wallet, and you can always speak with your local bank to see what options they may have for current account holders.
Read the Fine Print: Fees and Interest Rates Matter
Before signing up for a card and deciding to use it, it is important to understand all of the fees and interest expenses that may be incurred. We have mentioned it a few times in this blog, but we feel credit cards can be extremely dangerous if not used correctly. If you are ever unsure about the fine print, we suggest discussing the idea with your personal advisor. When it comes to high fees and interest rates of credit cards, our belief is that it is better to be safe than sorry since the costs can escalate quickly.
Responsible Credit Card Essentials- Key Considerations
- We only recommend using a credit card if you’re almost certain you’ll be able to pay off the full balance each month.
- Credit cards offer attractive rewards and benefits as a way to encourage you to use the card so that they can charge transaction fees.
- Some cards even provide better rewards or benefits in exchange for paying an annual fee to the card issuer.
Speak With a Trusted Advisor
If you have any questions about how the upcoming presidential election may impact your retirement planning, tax strategies, our 401(k)-recommendation service, or anything else in general, please call our office at (586) 226-2100. Please also reach out if you have had any changes to your income, job, family, health insurance, risk tolerance, or overall financial situation.
We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.
Best Regards,
Zachary A. Bachner, CFP®
with contributions from Robert Wink, Kenneth Wink, and James Wink
If you found this article helpful, consider reading:
Sources:
- https://summitfc.net/debt-snowball-vs-avalanche/
- https://summitfc.net/budgeting-101/
- https://www.nerdwallet.com/h/category/choosing-a-credit-card
- https://www.nerdwallet.com/article/credit-cards/credit-card-annual-fee-free#:~:text=You%20can%20find%20plenty%20of,ahead%2C%20despite%20the%20upfront%20cost
- https://www.bankrate.com/credit-cards/business/merchants-guide-to-credit-card-processing-fees/