Written by: Brandi B. Graham, CFP®, CTFA
I remember standing in line behind a close friend of mine 20 years ago when she was writing a check to pay for her groceries. I asked her why she did not use her credit card. She said she did not want people to think she “had to charge her groceries”. Today, that same friend uses a credit card for just about every transaction. A credit card can be a valuable tool if you use it wisely, but it can also lead to financial woes if you do not exercise discipline. Using a credit card instead of cash can lead to over-use and excess spending leaving you with a credit card bill that seems impossible to pay off. However, if you use your card wisely, the benefits of credit card use can actually improve your bottom line.
Most credit cards now offer an array of benefits. Matching these benefits to your own purchasing preferences will help you to improve your finances. I generally use three types of cards. The first is a debit card tied directly to my checking account. My credit union pays me 2% interest on balances up to $20,000 if I use my card at least 12 times each month. I do not know about you, but I do not know of anyone else that pays 2% for FDIC insured balances today. I typically use this card to pay for small purchases of $25 or less. My second card that I use offers 5% cash back on various monthly promotions. I have to ‘opt-in’ for the promotions but that is a snap when utilizing the mobile app or online access. As of the time of writing this blog, the deal is 5% cash back on any restaurant purchase. I typically use the cash back to pay my monthly bill or to make purchases through Amazon.
I use my American Express card for everything else including automatic payments for cable, telephone, utilities, etc. It makes paying bills so much easier and I am “paid” for using my card. I chose the Delta AMEX card because I generally travel with a companion at least one time per year. My AMEX card gives me a free companion ticket to anywhere in the US each year. The annual fee is well worth the free ticket. In addition to a free companion ticket, I can accumulate “miles” with bonus miles on certain categories of spending. I have even used my credit card to pay for part of a new car purchase to take advantage of the miles or cash back. The dealer limited the amount that I could pay by credit card but that amount continued to earn 2% interest in my checking while I accumulated an additional 1% to 2% in my mile credits.
I use the miles I accumulate to pay for the non-companion ticket. I also receive free seat upgrades for myself and my travelling companion. I can use the accumulated mile credits toward purchases, or to pay my monthly account balance. These benefits may not be as important to others as they are to me, which is why it is important to ‘shop around’ for your credit card. For example, Bank of America has a card that pays you 3% cash back in the category of your choice, 2% at supermarkets and 1% on everything else. The chances are, there is a card out there that is just right for you.
It is important to keep track of your spending. Check your transactions regularly and make sure that you are not spending more than you can afford to pay each month. If you pay with cash, you are more aware when your cash supply gets low. The same thing applies to your credit card; check those transactions and balances throughout the month to make sure that you are not overspending. If you find that you are only able to make partial monthly payments and that your balance is rolling over, this is a sign that you need to reevaluate your spending. Typical interest rates on card balances range from 12.5% to 21% and over, with late payment fees of up to $40. It is important not to finance your cash flow shortages with credit card debt. This is one of the most expensive options for financing.
Do not be afraid to use your credit cards for your monthly payments and purchases. Just be sure to keep track of your usage and do not increase your spending because you still have available credit on the cards. Maintain discipline and stay within your cash flow means, be sure to check all your monthly transactions, and promptly report any unauthorized transactions. Your financial advisor can help you find a card that is right for you.