I get plenty of questions from my friends about my credit card habits. “Why do you have so many?” “Aren’t credit cards annoying?” “Can’t you just use a debit card?” “How do you stay out of debt?”
That last one, or variations thereof, is usually the most common. We’ve come to learn that ‘credit card’ is synonymous with debt. You know what? For a lot of people, that’s true.
But it doesn’t have to be! I follow just a few rules to make sure I make money (or miles!) off of credit card companies, not the other way around.
Here are my three cardinal rules of credit cards.
- Never purchase more than you can pay off in full each month.
- Never purchase more than you need.
- Always have a solid understanding of your finances.
Rule #1: Never purchase more than you can pay off in full each month.
Rule #1 can also be stated as, “Always pay off your card(s) in full each month.” Whatever floats your boat.
The first rule is about controlling your credit card usage. Credit cards should not be used as some kind of magic future money account. Treat your cards as indirect links to your bank account. Sure, the money doesn’t come out of your account right then, but you know it’s going to come out of the account later that month, when you pay off the card.
I think of credit cards as 0% short term loans. Why yes, I will be using a credit card today. I get home, see the balance online, and understand that I need to pay that amount by the statement close date, to avoid massive “loan default” (credit card interest) fees.
Would you turn down a 15% raise? No. Then why would you pay 15% more for everything you buy? Don’t let credit card companies take advantage of you.
Following Rule #1 also defeats late payment fees. If you pay off your card in full each month, by the due date, you’ll never pay interest and you’ll never pay a late payment fee.
Rule #2: Never purchase more than you need.
This second rule is general life advice, but particularly important with credit cards. If you’re purchasing more than you need, it might just be a little wasteful. Not the end of the world, especially considering your individual lifestyle. What’s wasteful to one person may seem perfectly normal to another.
Just understand needs vs. wants, and when and how you can get them. If you’ve got some extra spending money, your IRA is maxed out for the year, and you have no debt, go for it! Buy yourself a present, celebrate!
However, when you’re sitting on a mountain of debt, and you’re spending a lot of money on things you want, instead of need, it might be time to reconsider. Don’t get me wrong, with a pile of student debt, yes, you’re still allowed to go grab dinner with a friend. If you have a mortgage, it’s ok too. But if you have a lot of high interest debt (like credit cards), I encourage you to put the money to work eating away at that debt, rather than buying more then you need.
Of course, if you’re following Rule #1, this probably won’t be hard for you.
Rule #3: Always have a solid understanding of your finances.
At any given point, I should be able to ask you questions like “What’s your net worth?” “What’s your credit score?” “What are your current liabilities?” and you should know the answer.
You might not be able to give me your net worth down to the penny, but you get the point. I think every person needs to have a grip on their financial picture. As part of this process, I track my net worth, investments, savings rate, income, expenses, and credit score, all on a monthly basis. This entire process takes me about 20 minutes around the beginning of each month, and a few minutes each day. 20 minutes is a minor investment for a major return. Through understanding your money, where it comes from, where it goes, and why, you can lead a much more stress-free and financially enlightened life.
If you’re nervous about tracking, or don’t know where to start, start with one thing. Track your net worth for 6 months, then add in your savings rate or expenses. Get a credit card that offers your free FICO score. Maybe you can use Mint, or YNAB to start.
Follow these rules, and watch your money and miles build up! By using credit cards responsibly, you can rake in miles, points, cash back, and countless other rewards. I’ve been using credit cards for about 4 years now, and have never spent a dime in interest or fees.