Five Ways to Use Credit Cards Wisely

The Wall Street Journal lists five ways to use credit cards wisely including:

Here are five instances when it's wise to use plastic:

1. Making larger purchases or ordering online. "If you use a credit card, you have far more leverage to return the product than you would have if you used cash."

2. When traveling. Ms. Sandberg says credit is "safer than carrying all that currency around with you," adding that credit cards also are "essential" for travel if you're going to get a hotel room or rent a car.

3. When buying necessities. Plastic also can be helpful in emergency situations, such as a health-care crisis, says Tim Wesling, president of a personal financial planning firm in Alexandria, Va.

4. When using a budget. Statements from credit cards can help with budgeting, experts say. Consumers can put together a monthly budget based on their spending in the prior year.

5. When building up reward points. Using a card that earns reward points that you can redeem for merchandise, travel or something else puts extra money in your pocket -- especially if you pay off your bills each month.

Here's my take on the entire issue:

1. Personally, I love using credit cards and have done so for almost 20 years. During that time I have never paid one penny in interest or fees because I pay it off every month. If you can do this, you're a candidate for using a credit card. If you can't, you need to limit or eliminate credit cards from your life.

2. I only use a credit card for spending that's in my budget. If it's not in my budget, I don't buy it -- with a credit card or otherwise. Again, this is a rule people should follow if they want to use a credit card.

3. I use cash back credit cards and have made good amount of extra income from them. I think they have advantages over points-based credit cards, but I realize that what the actual "best" rewards card is for any one person is highly dependent on how the person uses the card, what he charges on, how much he charges, and what he values in a reward.

4. I try to charge EVERYTHING on my card -- to get as high of a reward as possible. I'm up to almost $3,000 in cash back over the past four years. Not bad, huh?

5. I've seen the studies that say the average person will spend more with a credit card than without one. I believe that is probably the case. Then again, the average person has fairly poor financial management skills. I don't think that I (or many other people who have a good control of their finances and any sense of self-control) spend any more money simply because I use a credit card.

Comments

[MB]

I whole heartedly agree with all of these points. We use credit cards for all of our purchases also, for mileage points, and it has worked VERY well for us.

We use mint.com to track our spending and to budget and it has been great. I love that you can track certain categories, like groceries or eating out.

I have a friend however who rarely uses credit cards. She takes the Dave Ramsey view and feels she will spend more. In fact, she and her husband use the envelope system for their variable expenses (groceries, shopping, eating out, etc). Yet, they still live paycheck to paycheck, don't have an emergency fund and they don't track what they spend. So, every month they spend these envelopes full of cash and then start over again every month, without any real realization of what they are spending (including eating out for lunch every day!)

While, I, with our credit card, track what we spend through mint, ultimately spending less and saving more, since I can tighten the belt later in the month when I see we've maybe spent to much at the beginning of the month.

[SaveBuyLive]

I agree with all your points except number 5. You probably are spending more money with a credit card regardless of how good you think your financial management skills are. I'm not knocking you or anything, because I suspect your skills really are good. But pretty much every psychological study I've read (and I've read a lot of them) suggests that people routinely overestimate their abilities.

Furthermore, the more distal (farther away) the consequences are from the action the less weight you are going to assign to them. In other words you'll think slightly less about spending with a credit card because you'll pay later with a check rather than paying right now with hard cash.

All that being said I feel that if you are routinely spending less than you earn then using credit cards is probably no big deal. You might even break even when you balance out spending more with cash back. But if you are living paycheck to paycheck it's probably a good idea to use cash for as much as possible.

I would add a sixth point to the list. Credit cards let me easily track all my spending. Every day my financial software pulls the most recent transactions from my credit card company and I can see exactly where my monthly budget stands.

[MC]

I agree with everything on this post, except one huge benefit of credit cards was left out: there are few better and faster ways to raise money in an emergency than with credit cards. Of course you have to keep your balances low and your credit good in the non-emergency times, in order to take advantage of this!

When my ex-husband deserted me and our kids and then took over and froze our joint bank accounts, I was able to keep on paying the mortgage and to hire a good lawyer to represent me only because of my collection of personal credit cards on which I had no debt and > $25,000 in credit. Even though I work full time and make over 6 figures, I couldn't have raised all that just from my salary within a few weeks. It took 2 years for the divorce to be finalized and for him to hand over (finally) my share of our savings and investments. The divorce was horrifically expensive, but it would have been far worse if I couldn't have hired legal counsel.

[Lee Thaubald]

About your point number one: "During that time I have never paid one penny in interest or fees because I pay it off every month. If you can do this, you're a candidate for using a credit card." If you can do THAT, then you do not NEED a credit card, and there is absolutely no point to telling people "you don't need a credit card, so you should get a credit card."

You need a credit card when you have a need, and you cannot afford at the moment. Your Air Conditioner breaks down, and you don't have the $2000 available for a new one, so you use a credit card, and pay it off over time.

Otherwise, good points on the other ideas.

[Sarah]

Lee, there is a point: the other conveniences that credit cards do have. They're not worth interest charges, but if they are "free," then some of them are worth having. FMF lists them in this very post so I needn't repeat him.

[Gia]

#1. I agree with the online purchases it. Cash and debit card works great for everything else (including online spending, debit card).
#2. Whatever. Debit card works just as well.
#3. Have an emergency fund. A credit card isn't one.
#4. Keep fooling yourself.
#5. Bonus points can be fun, but they encourage unnecessary and impulsive spending.

[Corporate Barbarian]

Don't forget zero % APR arbitrage. I know the deals are few and far between now, but in the past this was a good way to pick up some interest income, as long as you're disciplined enough to make the monthly minimum payments.

[MoneyEnergy]

I agree with the whole post, too, except maybe #3 - ideally, you want to have a large emergency fund set up for health-care costs. I would not recommend credit card arbitrage. I haven't used "cash back" cards because they seemed more trouble than they are worth, especially if you're limited to where you can spend, etc. For me it's best to limit my credit card use and try to use it only for travel and online purchases.

[rwh]

So far this year I've charged 13k on my Schwab card. At 2% reward about $260 has gone directly into my Schwab One account since Jan. 1.

I can honestly say not one dollar of those charges are for items I wouldn't have bought anyway. They are all routine purchases, plus all my major monthly bills go on the card and any business travel expenses, major expenses such as home repairs etc.

And since my checking account pays 4.25% I've earned more interest by by keeping the cash in my account longer instead of using my debit card or writing checks.

I can't say I've NEVER paid a finance charge, but I estimate no more than $50 total. I've had credit cards for over 30 years.

[kitty]

@SaveBuyLive "But pretty much every psychological study I've read (and I've read a lot of them) suggests that people routinely overestimate their abilities."

"People spend more on average" is not the same as "everyone spends more". "people routinely overestimate ..." is not the same as "everyone ...". The latter just doesn't follow from the former, yet virtually everyone who refers to these studies seem to imply it does. All "people spend more on average" really means is that if you take, for example, 100 people who use credit cards and 100 people who don't, than the total amount of money spent by first 100 will be higher. Higher total divided by same number of people = higher average. But unless you know the distribution, you cannot make any conclusions about individuals.

Everyone who carries a balance spends more with cards and, consequently, spends more. So, if you include those who carry balance in your study, you'll get higher total bill. But unless you look specifically at people who always(!) pay their balances in full, you cannot conclude from your studies that they spend more.

I challenge you to find a single study that looked specifically at people who do not carry balances, not anecdotal personal story but a study.

@gia:
#3."Have an emergency fund. A credit card isn't one."
Is your emergency fund large enough for over $1000 in 20% co-insurance for every single chemotherapy treatment? One may need quite a few of such treatments depending on the specific chemo and specific cancer. Add to it various tests, surgeries - you get the idea. An insured friend's of my out-of-pocket costs for her husband's sarcoma were in mid 5 digits. Oh, you have HMO? What if a clinic or a doctor that could offer best chance of survival is not on the list? What if a specific drug is not covered? Is your emergency fund adequate? FMF specifically mentioned health issues, by the way, not some minor life things like a car breaking down.

#4. Keep fooling yourself.
Why are you so sure everyone overspends with cards? Because you did? I've used credit cards for over 25 years and have never paid interest. I think once or twice I thought I would be late - I called the bank and they forgave it... But since they invented automatic payment of the full balance, this isn't even an issue.

We have a number of bills where we don't pay right away - gas, electricity, telephone. Yet we don't normally set our thermostat to 78F in winter so that we could walk around in sundresses. Even if we do it once, as soon as we see a large bill, we change the settings down the following month. Same with cards. The trick is just to look at it as just another bill.

[F]

5. Quote FMF: "I don't think that I spend any more money simply because I use a credit card."

Oh yes you do. It's psychological. If you pay in cash, you're confronted more with the fact you're expending/losing money. There is even a difference between paying in $1 coins and notes (the latter feels like a bigger loss). Anyway, I like credit cards too (convenience!).

[FMF]

F -

No, I don't think I do.

Some studies show that the average person will spend more with a credit card, but this doesn't mean all people will. I think I'm one of those that don't. Why? Because I only buy things in my budget.

Of course, a credit card makes it more convenient to buy (you can't buy with cash if you don't have enough money).

We've discussed this issue a few times here. Maybe it's time for another round...