Yes, you heard me right.
I think that EVERYONE should ALWAYS use credit cards.
Sounds a little weird coming from someone who prides themselves on financial literacy, doesn’t it?
I know, I know, it’s weird, but you need to hear me out on this one.
I feel like every day there are so many people using credit cards, but using them incorrectly and not taking full advantage of what Credit Card companies are offering.
Granted, some people get in tough spots and sometimes are FORCED to use their credit cards to survive, but this post is for those who aren’t in a dire situation.
In this post I’ll explain:
Most “financial gurus” out there will tell you to run from credit cards. They’ll say that they’re the worst way to accumulate debt and you should avoid them at all costs.
I’ve been using credit cards since I was 16 years old and the payoff has been amazing.
But first, let’s explore what conventional wisdom says;
Interest Rates of Credit Cards Are Too High
The typical argument against credit cards is that the interest rates are too high.
In November 2017, CreditCards.com weekly credit card rate report indicated that national APR was 16.15% on credit cards.
Is that too high?
Well, let’s compare it to the three main loan types that many people have.
Auto Loan: According to ValuePenguin.com, the average auto loan interest rate for 2017 was 4.21% on a 60 month loan.
Home Loan: Bankrate has the average home loan interest rate at 4.51% for a 30-year mortgage.
Student Loan: CNBC reported that student loan interest rates are currently at 4.45% for a 10-year loan (after school is completed).
Now, I know, most of the loans I mentioned above are typically over a longer period than credit cards, right?
Not necessarily, and that’s the shocking thing.
ValuePenguin.com found that the average American credit card debt number sits at $5,700 and 38.1% of households carry credit card debt.
While one could argue that credit card debt is typically only for the short-term, these numbers indicate otherwise.
When you have a $5700 balance on your credit card, It’s no longer a short-term debt number. It’s become a long-term debt that needs to be paid.
So, looking again at the numbers above:
Credit Card: 16.15%
Auto Loan: 4.21%
Home Loan: 4.51%
Student Loan: 4.45%
Are the interest rates too high on credit cards?
We’re looking at almost quadruple the interest rate on a credit card compared to every other major loan type.
But does this stop me from recommending you use them? Nope…not as long as you use them correctly.
Credit Cards Contribute to Long Term Debt
Beyond the astronomical interest rate on credit cards, financial guru’s also say that credit cards contribute to long-term debt.
We don’t have to look far for the answer to this one.
As I stated above, a study by ValuePenguin.com indicated that the average American credit card debt number sits at $5,700 and 38.1% of households carry credit card debt.
I’m willing to bet that most people who read this don’t have $5,700 sitting in the bank ready to pay off that average credit card debt.
So, I think it’s safe to say that credit cards do contribute to long term debt.
Does this stop me from recommending that you use them?
Nope. Again, you just need to use them the right way.
Monthly Payments Ruin You Financially
Using the figures above and using this credit card minimum payment calculator, we can determine that the average American pays about $230 a month to their credit card.
Is that amount crushing?
For most, the answer is no. It’s manageable, and that’s why they use their credit card in the first place.
But what is the opportunity cost of paying off a credit card as opposed to investing $230 a month?
Well, using this compound interest calculator we can see that if you invested $230 into a retirement account every year that was getting a 5% rate of return every year, after 10 years you’d have an account with $36,450.73.
Will these monthly payments ruin you?
Well, if you want to have a retirement…. they very well could.
But again, I STILL recommend that you use credit cards. More on that later in the post.
Before I get into the correct way to use credit cards, I think I need to address the changes to your mindset that you must make prior to using them properly.
Realize How Much Money You’re Borrowing to Spend
One of the things that people don’t talk much about is that when they spend money on their credit card now, they’re paying extra money later to do so.
As an example;
If you really want a $1,000 TV right now and decide to buy it on a credit card with a 16.15% interest rate that means….
If you make 12 payments of $90.80 and get it paid off in a year, you’ll actually be paying $1089.60
If you make 24 payments of $49.03 and get it paid off in two years, you’ll actually be paying $1176.72
If you make 36 payments of $35.23 and get it paid off in three years, you’ll actually be paying a whopping $1268.28
Understanding just how much something really costs when you purchase with a credit card is a good way to change your mindset.
After all, are you willing to pay (at least) 8% more for the item just to have it quicker?
Most will answer “no” to this and the majority of the time, credit cards are covering unnecessary expenses, just like a new TV.
Now I know, sometimes dire circumstances happen and you have to use the Credit Card, but that isn’t the situation I’m referring to here.
Want vs. Need
I have this conversation with my wife all the time.
She’ll see “The absolute most amazing pair of shoes ever created on this earth” and say that she needs this item.
She wants this item, she doesn’t need it.
The way I see it, a need is something that you must have to survive.
Healthcare, food, water, electric, etc.
But I don’t think my wife is the only person who thinks that she needs certain things that she actually just wants.
When you’re looking at a potential item to purchase, think whether you want or need it.
If you want it, and it’s going to put you into considerable credit card debt, stop right there.
If you need it to survive and a credit card is literally the only option you have, then you may be able to make a exception.
The point is, before you purchase anything that may put a significant amount of debt on your credit card, question whether you need or want that item.
If you decide that it’s just an item you want, that’s fine.
My advice is that you need to save more money before you purchase it and be more patient.
Is it ideal? No.
But neither is having significant debt at a 16% interest rate, deal with it.
Buy What You Can Afford Now
This point goes hand in hand with the “Want vs. Need” argument.
At the end of the day, you need to understand that the only things you should put on a credit card are things that you can afford right now with cash.
The only exception to this is if there is a need that pops up and a credit card is your only option.
Otherwise, you need to always have the mindset that you should be able to pay for everything with the money available in your bank account right now.
Not next week when you friend pays you the money they owe you.
Or, at the beginning of next month when work pays you
Some of you reading this probably think this is no way to live because this basically means that you’re waiting for a paycheck every month before you spend everything, right?
What I mean is that whenever you buy something with a credit card, you should already have that money in a bank account of some type that you can pay it off with.
It could be a savings account, an investment account, any type of account that can easily be withdrawn from to make the payment.
Does this mean you should pay it right away?
I just want you to have the cash available.
In an ideal world, you’ll go month to month with your regular expenses and make enough money to pay the card in full every single month.
The kicker here though is that if your employment ends or some type of large financial burden comes along, you can still pay off those regular expenses in full if needed.
Now that you’ve got the mindset down, the next step is understanding how to use everything to your advantage so that credit card companies hate you.
That’s my goal when I use credit cards. I want the company to HATE me so much, but continually reward me month after month.
I want to take full advantage of every single perk that the credit card companies have and find a way to take money from them, not give it to them.
Do my methods work?
Here’s a video that I posted to Instagram where I was able to pay for my dad and my step-mom to take a trip to Italy (Airfare and Flight) for free.
I was also able to do the same thing for my mom and step-dad.
And I still have over 300,000 miles to fly anywhere in the world for my wife and I.
Below is what I did to make that happen.
Pay the Credit Card Off Every Single Month
I already know some of you reading this have credit card debt and are struggling with it.
The #1 thing I advise everyone to do, regardless of the situation, is to pay off credit cards and do not carry a balance month to month.
At the national average of a 16% interest rate, when you carry a balance, you’re paying quite a bit of money to use money that you will eventually accumulate if you’re patient.
The key to taking advantage of credit card companies is, again, not carrying a balance month to month.
If you do this now, work hard to pay off your balance and try to never do it again.
The foundation of my method is that I don’t carry that balance.
If you can get to a point to where you don’t carry any credit card debt, you’re ready to take advantage of credit card companies.
Points Are How You Beat Credit Card Companies
If you don’t hold a balance on credit cards month to month, then you’re simply charging things on your credit card that you can afford and then paying it off at the end of the month.
Doesn’t really sounds that cool, does it?
Make money -> Charge Purchases on Credit Card -> Pay Off Credit Card – Do this every single month.
So where do you come out on top?
Mileage and Point programs.
Let’s say I spend $1000 a month on various bill such as cable, phone, internet, groceries, eating out, gym, gas, and any other regular expense.
That means that in a given year I’ll earn at least 12,000 points or miles. This is, of course, assuming that I don’t buy anything that gives “double the points” and from my experience, you’ll usually make some eligible purchases without realizing it.
I find over and over that I make purchases that double, or sometimes even triple the points without even paying attention.
These points are literally free money given to you by these companies.
I just looked at my Chase Ultimate Rewards card and 10,000 points equates to $125.
In other words, when I spend around $10000 (maybe $8000 with all the double/triple reward promotions) I make $125.
Because I never carry a balance, that’s just icing on the cake.
Keep Budgets to Avoid Overspending
One of the cautionary things I’ll say to you is that you still need to keep budgets of your spending when you use these credit cards.
For this, I use Personal Capital.
I used to use Mint.com, but then they destroyed my years’ worth of data for no reason and I vowed to never use them again. But that’s a whole different story, plus Personal Capital is actually better anyway (and it’s also free).
But, back to my point, you need to still keep budgets when you use credit cards for one simple reason.
Tracking your spending.
I’ve found that if I am not tracking my spending and just use credit cards, I tend to overspend because I don’t really do anything more than swiping a credit card at a register.
I like a tool like Personal Capital to help with this because when I use the credit card, it’ll automatically record the transaction in my account and thus, making it easier to track everything down to the penny.
Leave The Points Alone
I think it’s important to basically ignore your points for a year or so.
I say this because although I could focus on my points and spend all of my time trying to figure out how to gain more of them with eligible purchases, I’d much rather focus on more important things and build the points in a passive manner.
By simply using a credit card and making sure I have budgets in place, I’m able to get a ton of points with very little effort and energy.
Could you research more into double/triple rewards and take even more advantage of a points program?
Sure, but that’s just not for me.
Credit Cards Have Annual Fees
Though I love that credit card companies probably hate me, the one thing you need to remember is that most cards that have quality reward programs have annual fees.
For me and my United Mileage Plus card, that cost is currently $95 a year. Is it a little annoying? Sure. But when I accumulate 100,000+ miles per year, it pays for itself and then some.
That said, realize that with my method, you still get the shaft when it comes to an annual fee, but as long as it’s not too high you should be fine.
Points vs. Miles
Some cards offer miles (like my MileagePlus credit card) while others offer points (like my Chase Ink credit card).
But this brings about an important learning lesson.
When you go to get a new credit card, research online for the best programs and also speak with your bank’s representative.
The only reason I have a Chase Ink credit card is because when I signed up and spent a certain amount of money, I was able to get 30,000 extra points.
The cool thing though is that the bank representative explained that I could take those points and transfer them over to miles very easily at no fee.
This all happened in the first place because I formed a new business and needed a credit card for the LLC, but I won’t bore you with the details of that.
The lesson that I’m trying to get across is that you need to speak with bank representatives about their best offer and research online to find the right card for you.
All cards are not created equal and some have amazing benefits, while others are really lacking with their rewards program.
So, what do you think about my advice? Do you take full advantage of credit cards? Does this seem like a feasible plan for you? Let me know in the comments below!