Credit Cards are like Guns: They Can Help or Hurt
Walking around with a wad of cash used to be real cool
These days it either signals you’re a drug dealer or gives off a vibe similar to that of a guy wearing an unreasonably under sized t shirt. It’s not the worst, but we can do better.
In regards to the movement of your cash, most of the time there’s more benefit to using credit as opposed to cash.
When I say credit card what’s the first word to come to mind? DEBT!
That’s what comes to my mind.
I’d wager that’s the word that comes to mind for a lot of people. Now why would I be advising to start avoiding cash which ‘helps you budget’ and move to credit purchases which ‘can ruin lives with debt’?
Because similar to guns, credit cards can either help you, or break you.. Literally. It all depends how you use it, in both cases.
NOTE: The points and strategy I will be outlining in this article apply to people whom have mastered the consumer behaviours and finances to a certain degree. There are many benefits to credit cards, as you will see. But they can become a quick spiral to debt, despair and doom. Proceed with caution.
Needs & Wants..
When it comes to negotiating, war, hunting and many other functions, you can accomplish your end without a gun. But having one is extremely more efficient.
Your risks are considerably heightened, though.
The situation and consequences are mirrored when using a credit card for your transactions.
A brief overview of the credit card. An agreement between yourself and an organization. They allow you to purchase goods up to a set amount and pay later. Their hopes – and intentions to make money – is that you either forget or are unable to pay at the time necessary and end up owing them interest.
I’ll tell you, business is good for these lending organizations. People automatically think free money and spend uninhibitedly.
Now since most people know credit cards can get them in trouble, and that using physical cash helps them become more reserved… Why would anyone choose to use credit cards?
For a few reasons..
The golden carrot..
Because these lending organizations dangle a very attractive carrot in front of us as incentive to choose to use their particular card. These are the perks of usage. They come in many flavors. From airmiles delivering free flights, hotel and restaurant discounts, to cash back, exclusive offers and points that can be redeemed for various consumer items.
All for spending money you were only going to be spending in the meantime. Hopefully.
Manipulation of credit card use can get free flights, also known as travel hacking. Or provide a tasty little once-a-year bonus. I got back nearly $400 dollars this year because I bought gas, groceries and paid my bills with a credit card that had a strong cash-back incentive program.
This is where the discipline must come in. Not to think you’ve been granted free money because you have a $5,000 credit limit. And end up spending beyond your means.
Have you ever applied for a loan or mortgage from the bank? If so, you’re familiar with the necessity of a credit score. For those who haven’t, banks lend money to you because they know you don’t enough money and can capitalize on making interest off you. But the bank doesn’t just toss money at anyone and everyone. They need to have a reasonable belief that you will pay them their money back.
Among the many prerequisites they have for you to access their cash, one is looking at your credit score. This is essentially your financial reputation. It’s a number between 300 and 850. The graph below describes the various levels.
Your credit score is influenced by a variety of factors; assets, how consistently you pay back debt, etc.
Using a credit card PROPERLY can help increase your credit score. If you spend lots and consistently pay it off this helps your score.
Having 1 to 2 cards helps your score, having many cards actually can affect your score negatively.
If you’re young, having a great credit score might not seem important. But one day if you ever want to buy a house or car – god forbid.. – or start a business.. You’ll want to have that puppy above 700.
This will be more important to the analyst-type mindsets. Using a credit card can actually help you have a deeper look into where your money is going. Your monthly statements have a record of every transaction. This can help you see where you are overspending and where you might be able to cut back and start budgeting better.
Can might help you spend less in the moment. But using a credit card can give you insight into long term trends and help you make necessary changes.
Okay, credit cards are not the devil.. Now what?
I wouldn’t be providing much value to you if I just talked up these little pieces of plastic and then walked away, would I?
I do like teasing though, so I’m just going to leave you with a few tips for picking the right card. In the near future I will provide a follow up post on specific cards that you may find interesting.
More Notes: I am not an accountant, financial planner, or financial advisor of any sort. I am just a guy who lives frugally, is interested in money and getting a damn good deal. I also think I’m slightly clever. Regardless, all this advice should be taken with a grain of salt. Remember, it’s always best to contact a professional before making major financial decisions.
Travel miles: Look for cards that give bonus travel miles for signing up. This is one of the main ways banks and companies look to hook new users in. With a mass amount of travel miles for signing up. Just watch, sometimes you need to spend a certain amount of money within a specific time frame to claim the miles.
Cash back: There are cards geared towards travel, and then there are cards geared towards cash back on purchases. There are usually tiers for how much you get back (1% on random purchases, 2% on bills, grocery and gas) You can hook up monthly bills, shop at specific places to really take advantage of these cash back bonuses.
Rewards: These cards interest me the least, as I’d rather have money or travel tickets than toaster ovens and golf club sets. But if you’re into growing roots over wings, a rewards credit card might be up your alley.
Having more than 2-3 credit cards can hurt your credit. Having only 1 can hurt. I like to have one card with a low limit and that doesn’t ding me for international purchases in different currencies for online and foreign purchases. Then I keep one card with a great cash back program that I continually raise the maximum on. Having a large credit line can help to get better deals and negotiate later in life. Better to have it and not need it, then need it and not have it.
That’s all for now folks. Look back in the future for more details on specific cards. Start looking to switch yourself from using paper to using plastic if you have the financial discipline. And check out Web Hosting Hub to start your own blog. Use that link for a killer deal on hosting and a domain name. Online real estate baby, online real estate.