by Michael
One of my more extreme positions is that debt is bad. There was a point in time when I planned to live a completely debt-free life. This included never having a credit card. As I now have some credit cards, my thinking has changed. This week I thought we’d take a quick look at why my thinking has changed and what, if any advantages credit cards have.
Disclaimers
As with everything else on this blog. This is purely opinion. Nothing within should be taken as financial advice.
As always I’m going to put all of my caveats right out the gate. I think credit cards can be useful assuming you’re not spending more than you can pay back in a month.
You also need to be paying it off in full every month. I only think credit cards can be useful if you’re paying them off in full, any amount of interest is bad.
Credit cards are a tool. Like a nail gun, if you take the safety off it can get you into trouble. Unfortunately, credit cards make it so you have to install that safety rather than forcing you to have to remove it.
I highly suggest setting up autopay to pay off your card in full. Then you barely have to think about when it is due.
My Background
Before I started working towards FIRE, I planned to buy a house on a mortgage and then devote “every” penny I could towards paying it off early. Then that would translate to roughly an extra $1,000 a month. At the prices I was looking at in the area, that would be a roughly 50% increase in paying off the mortgage. It’s kind of hard to get a mortgage without a credit score though.
So I opened my first credit card. It wasn’t a great card, had a super low limit, and had a laughably low bonus for opening it (I think they matched my cashback bonus for my first six months to a year if you spent at least so much money). It was that bonus that started to change my thinking. While I completely understand the point of these incentives is to get people to put more money on the cards and not pay it off. It can be an extremely powerful tool. Granted at that point even with automatic payments on I paid off my card in full every time I noticed a charge had been posted, which is a little extreme. Now I pay them off on the first of the month.
These days I use the card whenever possible, assuming I’m not being charged a fee to use the card. Then I pay it off in full before it can accumulate any interest. Essentially where I was using a debit card before I now use the credit card and treat the credit card as though it were just my debit card.
What are the advantages?
To me, the biggest and only advantage of a credit card that someone who is actively saving money should be interested in is the points. I occasionally redeem points to pay off bills early but overall I plan to just sit on them and instead use them for larger purchases down the road.
I also use mine to kind of keep track of my budget. At a glance, I can see that I have X amount on my cards which means I’m left with Y amount for my total budget, and if I’m at risk of going over and need to look at curtailing spending for the remainder of the month.
Overall you should aim to be the least profitable customer for whoever issued your credit card. By minimizing the profits for the lender and maximizing your benefits you stand to make the most money.
Disadvantages
As always I’m looking at these disadvantages mostly from a money perspective. There are some other disadvantages that I’m ignoring in this post. I’m also assuming that if you are interested in the money-saving benefits of a card you are in a financial situation where you can pay off your credit cards in full or will be able to after you finish paying off your existing debt.
Interest is the killer with credit cards. According to this article, the average rate for credit cards is almost 25% in the United States. That’s crazy, almost four times that of a mortgage at the current prevailing rates. In the end interest on loans is similar to friction, moving forwards is a lot harder with it resisting your movement. At those rates it’s almost 12% extra if you take a year to pay the debt from any payment off, it does drop to about 2% if you accumulate interest for 1 month. If you can avoid it, you shouldn’t carry a balance on your credit cards from month to month and save that amount.
I also do think credit cards incentives spending, as is backed up by this article. Although I don’t agree with everything in that article, especially on spreading large purchases out. But it does show there is some link between using a credit card and spending more than one would with cash. As at this blog, we try to save money, this could be a bit of a problem. If you don’t have ways to control your spending or are worried about going over budget or into debt due to your use of a credit card you should avoid opening one until you have systems in place to ensure responsible use.
All About Points
Now that we’ve evaluated both, let’s take a look at what those points you’ve started to accumulate can be used for. The answer, of course, is that it is up to you and depends on your goals.
For me, some guy on the internet, I mostly save my points. Every once in a while I’ll use them to take some cash off the top of my bills. But for the most part, I’m just passively accumulating them at the moment. I may use them to cover some travel or to cover larger purchases.
Mostly it’s that I just kind of forget about them in their entirety and then remember several months later. Maybe down the road, I’ll have more concrete amounts that I’m looking to accumulate. I’d be better served to use them over short periods so that the value isn’t lowered due to inflation, especially when I don’t have a goal for them.
The same thing is kind of my thoughts between points and miles, depending on your goals you might be better served by miles than points. For the card I mostly use these days, it gives 2% back on every purchase and 5% on certain qualifying purchases. As a result, I’m paying closer to 95-98% on every purchase.
I’m not the person to talk to about credit card churning. I’ve looked into it and decided it’s more work than I want to put in with opening and shifting automated expenses over to a new card every so often. But here’s a quick primer on some of the strategies one could use. I got a couple hundred bucks in total on the cards that I have opened.
Closing Thoughts
That’s kind of it. Points changed my mind on credit cards with some caveats. If you’re paying off your card in full every month and it’s not causing a significant increase in your spending, I see no reason not to use a credit card, after all those points could help you save money and achieve some of your goals.
