In a society where obtaining credit is as “easy” as signing over all but your own two feet in exchange for access to instant “cash”, learning when exactly to whip out that plastic piece of magic is the difference between crashing down the rapids of looming debt and floating down the lazy river of responsible spending and stellar credit ratings.
It may be tempting to seal yourself into a financial bubble and just stick to cash – maybe securing a “check card” that you can use as a “credit” card when you absolutely have to make an online or over-the-phone purchase – a method that is safe because it’s coming right out of your checking account instead of adding onto that invisible tab the credit card company is so eagerly keeping track of for you. But face it, paying exclusively with cash is going to leave you left behind as a ghost in the world of good credit, home loans, car loans, and many other things (unless of course you have a huge stash of cash for 50% down payments, in which case you don’t need credit anyway).
Using credit wisely can do good things for your future. So how, you may be wondering, do you use credit wisely? When do you use a credit card instead of cash? When should you NOT use a credit card?
As we’ve all begun to figure out, there are just some times you HAVE to use a credit card – namely for Internet sales. Fine, go ahead, no harm done – but a piece of advice: make sure you’ve got the cash to back that purchase up. Even set aside that amount so when your credit card bill gets stuffed into your mailbox with those other credit offers, debt collection notices, and monthly bills, you will proudly be able to pay it in full.
Credit cards can, believe it or not, work to your benefit. As I just mentioned, paying your montly balance in full lets you “buy now, pay later” without accruing fees and penalties. But besides that, what do you really get out of it? Some cards over substantial, worthwhile rewards. I’m not talking 10,000 points for a cheap alarm clock you could’ve just picked up at Wal-Mart. I’m talking CASH BACK.
Discover, for example, offers a “cash back on gas” program where gasoline purchases earn you 5% cash back, which you can redeem as a check or apply directly to your bill. Basically, they are paying you to buy something you already buy on a regular basis. The only difference is you’re paying with their card instead of cash. If you stick to my initial tip of backing it up with cash, you are the clear winner in this deal.
American Express offers a new “The One” card, which features a deposit into a high-yield savings account that is equal to 1% of your purchases on the card. Again – back it up with cash and pay your balances in full and you are basically getting FREE CASH. A caution: don’t be tempted to go out and spend, spend, spend just because you’re getting “cash back”. One percent is not a car payment. It’s a little something extra. If you really want to start saving for Junior’s college fund, deposit the $300 you thought about spending on clothes rather than charging it, and earning a measly $3 in cash back bonus.
Bank of America has a program called “Keep the Change” that “rounds up” your purchase to the next dollar and takes that “change” and deposits it into a savings account. Again, free money.
If you can exercise restraint in your purchases, using a credit card with rewards can really do some good things for you. Just remember – use it only for purchases you would normally make regardless of rewards (gasoline, groceries, recurring monthly bills), back it up with cash (be sure you can pay your monthly balances in full), and choose rewards that are worthwhile, such as cash back that is deposited into interest-earning accounts.