You should be buying everything with credit cards. If you pay your bills, for groceries, for gas, or anything else with a debit card or straight cash then you are throwing money in the garbage. You need to get a solid cash back credit card – today!
If you remember our article on defining success, then you already know you’re probably spending at least $13,000 – $14,000 dollars on whatever you buy each year. To figure out the exact amount you spend you need to set up your budget. With a super low-maintenance credit card you could be getting 2% cash back on all purchases. I know you’ve seen the commercials where Samuel L. Jackson yells at you about the cash back. Listen to him. He knows what he’s talking about. Some cards give back up to 6%! If you spend $14,000 that 2% puts $280 dollars back in your pocket every year. At 6%, that’s another $840! What would you do with an extra $840 dollars?! That’s a lot of free money. The more you spend, the better the free money gets.
Credit cards get a bad rap because people don’t handle them responsibly. Just because you get a $1000, $5000 or whatever credit limit, doesn’t mean you should spend to it. Pay with a credit card, but treat it like you’re paying with cash. Don’t spend money you don’t already have. Focus on your budgeting. When you build a proper budget you know how much money you can spend each month, and you should never have a credit card bill that exceeds that amount. No matter what your credit limit is. I have a $15,000 credit limit on my daily-use credit card. My bill per month rarely exceeds $2,000.
I got my first credit card when I was just barely 18. I was working security for a Pitt Basketball game at the Peterson Events Center in Pittsburgh. At the time MBNA bank (now Bank of America) was running a promotion where if you signed up you got a pretty cool Pitt Panther bobble head. I wanted that bobble head.
I signed up, really thinking I wouldn’t even get the credit card. I was still super broke at this point in my life. I was working part-time for, I think, $12 per hour. I didn’t think I had a chance at being given a credit card. A few weeks later I got a letter from MBNA. I opened it up and found my shiny new credit card inside. It had a $500 limit! I never had more than probably $200 at any one time in my life, to this point. I don’t know exactly what happened after that. Definitely a bunch of movie trips. Definitely a bunch of food. The credit card was definitely maxed out. I didn’t make near enough money to cover what I spent, so, I was in the dreaded minimum payment game. My payments would barely even cover the interest. In no time I had 3 credit cards with limits up to $1500 and I was transferring balances between them just to keep from having to make the payments. I was in over my head. This is what so many people do when they start getting credit. Don’t be like young me. Take the advice in this article and use your credit responsibly. The negativity surrounding credit cards isn’t real; it’s really negativity surrounding a lack of self-control. If done right, you just end up getting a bunch of free stuff each year. There’s nothing wrong with that. If your mom gives you $200 and says you can only spend $20 each month; do you spend the whole $200 on day-1? I would hope not. If you do, it’s time to learn better self-discipline.
To help you avoid this pothole, I’m going to try to get really deep into a credit card payment schedule and bill example. The biggest thing is that if you pay your bill in full each month, you never pay any interest. Interest is a bad thing in regards to debt. Beware of upcoming math. Please pay attention.
This is month 1 and our credit card bill is $300. If you pay that full $300 then you’re done, good job! No interest charges will be added. Keep it up and that’s basically all you need to know about paying credit card bills. If instead you only manage to pay say $50, that’s where things start to get tricky. You get into interest paying territory. I’m going to simplify the concept a bit, but if you want to learn about compound interest, you can just read this info from Discover Card.
Now you can see, the spending doesn’t really stop. Last month’s bill doesn’t disappear. Now because we didn’t pay in full last month, we’re starting to accrue (accumulate or add) interest. There’s a new $6.67 charge which we have to pay even though we didn’t spend that money. This is what interest and not paying your bill in full does to you. Over the course of the year, spending $6.67 per month, you just wasted $80 and got nothing for it. That’s free money you’re giving to the credit card company. That’s your “I’m irresponsible” fee. If your bill is $5,000 instead of $500 – that’s an extra $800 you’re paying, for being irresponsible. This is what happens to a lot of people. Don’t let it happen to you. We use credit cards to get free money, not to throw money in the garbage.
If you can reliably use your cash-back credit card, then you start to build up a good credit score. With a good credit score you get a ton of benefits. One awesome benefit being access to free money from time to time. Free money doesn’t come around often in life, so you really have to make sure you’re ready for it when it does. The free money I’m talking about is through 0% interest credit card offers. These are amazing opportunities, and there are only two reasons to use them.
- Making investments with quick return opportunities.
- Getting out of an extremely temporary, tough situation.
We’ll start with option 1. 0% interest credit cards always offer that low interest rate only for a short time period. You may have 0% for 6, 10, 12, 18, or if you’re lucky 24 months. That means you can spend the full credit limit and not pay back a dime for that entire time period. If I had a $15,000 credit card with 0% interest for 12 months. That meant I could take $15,000 invest it into real-estate, flip that property, make $30,000 and pay back the original $15,000 before I had to pay a cent to the credit card company. That free money just allowed me to put $15,000 in my own pocket and I didn’t have to pay a cent for it. This is the best way to use 0% credit.
The second option should only be used if it’s a last resort because it is setting you up for failure. Say you get into a car accident and have to pay $5,000 to fix the damages. You don’t have the cash. You can grab a 0% card to cover the charges (assuming you have good credit from being responsible) and get out of this jam. You need to make sure that before the end of the 0% period you pay back that $5,000 or you are going to start getting hit with a lot of interest very quickly. If you’re following other advice on this blog you shouldn’t have a problem saving up $5,000 in 12 months to pay back that debt. Just make sure you have a plan in your budget to handle this cost and that you’re saving for it.
Some people use these cards for home remodeling or buying a new car. I don’t recommend this unless your furnace exploded or your car broke down. I would prefer that when you want to get luxuries, you save up and pay for them with money you have. Still pay with the credit card, but, pay the credit card in the same month with the money you’ve saved.
Now you’re prepared to take on the dark art of credit cards. Now go out and share this article with everyone you know. Too many people do not understand the power of credit and how to harness it. If you already fell victim to debt and just need to find out how to break free – follow me and stay tuned for my article on getting out of debt. I’ve been there, and my advice will help.
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