How to Use Credit Cards
What do you think about credit cards? Are they like best friends that allow you to buy things faster than you would be able to otherwise? Or, are credit cards a worst enemy that has left you or someone you love in shackles?
The Truth about Credit and Credit Cards
The reality is credit and credit cards are neither good nor bad. What matters is how we choose to use them.
I don’t think it would be unwise advice to tell a person to avoid using credit, to the extent that it’s possible.
However, if you already had enough money to buy everything you might need (including your housing) or to fully fund all of your investment assets, you wouldn’t still be working to become wealthy.
Facts about Credit Card Debt
At the time of writing this, the average American household has over $15,000 in credit card debt. Once you add in all other kinds of debt, including auto loans, student loans, and mortgages, the average household debt is over $130,000!
Some debt may be unavoidable. However, some people still spend thousands of dollars a year on things like entertainment, whether they have the money available or not.
Debt can be a huge burden on an individual or a family, and it’s something to avoid when possible.
Credit Card Debt vs. Mortgage Debt
I don’t like debt. I’ve seen too many people become slaves to it or be consumed by it. That’s one reason we paid off our mortgage on our last place as quickly as we could, even when interest rates were at historic lows.
I’m fully aware that we very likely would have come out better financially otherwise investing the extra money were putting toward principal on our home. I also realize that if the housing market were to go down from when we bought, we would stand to potentially lose a significant amount of principal if we subsequently needed to sell into a down market.
But once we owned that place (which we subsequently sold and now own a different home), we didn’t have that debt hanging over us, which has significant value to me.
Using Credit to Buy a Home
In many markets, buying a home using a mortgage can also be cheaper than renting. Using credit can help a home buyer accelerate their purchase.
In reality, most people need a mortgage to buy their home, and that isn’t necessarily bad debt. In recent years, mortgage rates have been at historic lows, and there are some potential tax benefits to having a mortgage.
Still, the debt associated with that credit limits a person’s financial freedom.
Reasons to use Credit Cards
There are reasons you may need to use credit cards along the way in life. Maybe you have a great business idea that might speed you along in your journey toward financial freedom, and you need more cash than you have available. Using credit cards might be the only way to get that business off the ground.
Since I’m risk averse, I would be more inclined to start a business on a small scale and attempt to cash flow the business. Or, if the idea is good enough, perhaps I could fund the business at least in part with some investors.
However, many businesses have gotten off the ground by cash flowing their businesses with credit for some amount of time.
Using Credit Cards for Cash Back and Frequent Flier Miles
One useful benefit of credit is the perks of credit cards. Many credit cards offer things like cash back or frequent flier miles. There are even people who have taken up credit card churning as a side hustle.
However, many money experts say people end up spending more money when they use credit cards than they would otherwise. When this happens, the cash back and frequent flier miles associated with credit card offers can be negated by increases in spending.
For this reason, it’s important to limit your spending.
How to Use Credit Cards the Right Way
With all that’s been shared, we’ve learned that credit is inherently neither a good or a bad thing. Debt and leverage can be useful tools for growing businesses.
However, debt, especially consumer debt, can also be crippling. Further, many of us spend more money when we use credit cards, even if we pay our balance in full every month and never incur any financing fees.
So, perhaps the best way to use a credit card is not to use one at all. Or, credit cards should be used strategically, and balances should be paid in full each month.