Yielding Wealth with Help from Your…Credit Card?
August 21, 2007 by Miranda Marquit
Filed under Finance
Yesterday, I implied that debit cards aren’t always the best options when it comes to paying for stuff. Why? Because simply taking money out of your account does very little to actually help in the yielding wealth department. But using credit cards wisely can actually help you maximize your money. But be forewarned: proper credit card use requires discipline.
The key: only buy what you can actually afford
Kelly made a very valid point in a comment on yesterday’s post. She pointed out that she is wary of spending money she doesn’t have. That is a valid concern. The key to proper credit card use is that you don’t spend money you don’t have. You basically pretend like the credit card is a debit card. If you can’t pay it off at the end of the month, you don’t buy it.
Why I use my credit cards
Now that we have established that credit cards can be okay if used properly, I will explain my credit card use system. I have three credit cards. I pay them off each month, so the perks I get cost me nothing in interest. And, because I have an interest bearing checking account, my money stays in there, working for me, the entire month until I pay off the balances. My credit cards amount to free money.
The first is a Capital One No Hassle card. I use this to purchase groceries and sundry items at the store. My airline miles build up. Because my husband’s parents live across the country, it is nice to be able to get at least one free ticket per year for our family to see them. This is saving money and a perk at no cost to me, because I don’t pay interest.
My second card is a Citi Upromise card. I use it for online purchases. This card puts money (albeit a small amount) into an account that my son can use for college. I shop online through the Upromise site, and often get extra money in the account for using the card AND for using the vendors. I am considering investing the money he has in the account so far into a 529 plan to further leverage the money made. Even without the 529 plan, my little boy will likely have enough for a year’s worth of lodging and books when he goes to college. At no cost to me — or him.
The third card I have is a Wal-Mart Discover that offers cash back. I use it only when I go to Sam’s Club (not very often) and when I buy gas. I also use this card to pay bills. Sometimes, if there is a big ticket item we’d like to buy, we save up for two or three months and then I use the Discover card to purchase it (we pay it off immediately). We earn cash back to the tune of $15 to $20 a month. Sometimes even more when we buy the big ticket items. It’s not a ton, but it is free money.
I have a friend with a Toys R Us rewards card. They put everything on it — bills, groceries, etc. — and then when Christmas comes they cash in their points and buy presents. Christmas comes free every year. I have another friend whose family does something similar with their Disney rewards credit card. A free family vacation every single year.
But you have to pay the credit cards off each month. And watch for rewards cards that have two-cycle billing. Carrying a balance can destroy the worth of your rewards. But if you choose your credit card carefully (pick the rewards that you will use), and pay it off each month, you can reap the rewards without actually paying the interest.
Some good points here – I like the UPromise bit and it also works for debit cards.
But the thing is, most people aren’t capable of paying off those cards every month. It’s too tempting to keep them.
I read that the average US household carries $10k in credit card debt now. That’s average. That includes my dad and my father-in-law, each of whom never has a balance. And me, who no longer carries a credit card.
It also includes folks like my friend, who landed herself $40k in debt, re-financed her house to pay it down, and promptly ran it up again. The latter tends to be the norm.
AND some cards charge you an annual fee if you DON’T carry a balance.
I just feel that, as a rule, credit card companies are a racket. They extend credit to those who can’t afford it (a big named jeweler gave my college aged brother a $5k line of credit on his minimum wage, part time job at a drug store) fully aware that the usurious interest rates will make it impossible to repay. Then, they cry foul when folks declare bankruptcy or default. I’ve seen it happen again and again.
And my personal example? While in law school, I was in an accident (I was a passenger). While waiting for the insurance company to repay me, I got into trouble with my credit cards (all of my med expenses were on a card). It took me awhile to pay them off and I did so in chunks. On the phone, when I was making my last payment, the same company that had called me irresponsible for months said to me, “Now that this is over, let’s see if we can get you set up again.” They then offered to increase my limit by several thousand dollars. Scum. They knew exactly what they were doing. Fortunately, so did I – and I said no.
Do I think that everyone is irresponsible with a credit card? Clearly not. But credit card companies don’t make money on responsible folks. They make money on those that can’t make their payments – for whatever reason. And that’s exactly why they prey on college kids (ever been to campus the first week of school) and lure you in with “prizes” at fairs and the lot.
Grr. Drives me freaking mad.
You, of course, have hit upon the crucial element. Discipline and self-control. For those who cannot control their spending, and can’t seem to stick to a financial plan, credit cards are not the way to go.
Credit card companies DO scam their customers (my first credit card was obtained as a freshman–but I realized even then, as I gathered my free tote for applying, that they could work in my favor). And in many cases they charge outrageous rates and fees. They are predatory. That’s why it’s important to remain vigilant, and be choosy. And disciplined. And avoid credit cards if you don’t think you can.
But the good news for me as that none of my credit card companies are making any money off of me. I choose cards that have no annual fee, and all of my interest rates are low and fixed.
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Debt consolidation and management can be helpful in some instances. However, unless a substantial change in attitude and practice with debt is made, the person will right back where he or she started. Debt consolidation only works if the person STOPS GETTING INTO MORE DEBT.
While credit cards are predatory, etc., it is important to change how one does things in personal finance. Debt consolidation is worthless unless fundamental changes are made.