Ok so in this post we’re going to talk about how to use credit cards wisely so that you can take advantage of all the perks they have to offer like a good credit rating, consumer protection, and free rewards.
I want you to enjoy all of this without falling victim to all the bad stuff like mounting debt and a lousy credit score.
Hi, I’m Sam. I’m on a mission to help women take control of their finances. How? With some simple tips around budgeting, saving and investing.
What Exactly IS a Credit Card..?
A credit card allows you to borrow money up to a pre-set limit. You use the credit card like a charge card/debit card and then you get a bill for what you’ve spent the following month.
You have the option either to pay back the full amount, or pay back a minimum amount (at least 1% of the outstanding balance, but usually between 3 and 5%).
With this second option, you have then ‘borrowed’ the rest and are expected to pay it back over time with a hefty interest rate.
Modern capitalist society is built around credit, and having a history of using credit well allows you to take advantage of a lot of perks throughout adult life.
The trick is to use a credit card wisely without falling victim to the negative aspects of credit cards.
So what’s the secret? It’s pretty straightforward, the hard part is in the execution. We can do it together. Here’s how : )
Let’s Dive into the Perks of Credit Cards
1. Credit Cards offer Extra Safety
Credit cards have the advantage of being safer to carry around than cash.
If your card is stolen and then used to make fraudulent purchases, you are much more likely to get the money back.
2. Credit Cards Help you Build Your Credit Worthiness
Another huge advantage of using a credit card is that they are a really handy way to build up your credit score.
This is useful when you apply for any type of loan.
Credit Scores: The Cat’s Whiskers
A good credit score would help you qualify for loans and credit cards with lower interest rates. The scale below is for a credit score range between 300 and 850:
- 800 to 850: Excellent
- 740 to 799: Very good
- 670 to 739: Good
- 580 to 669: Fair
- 300 to 579: Poor
An Example
For a loan of $20,000
A borrower with an excellent credit score might be offered a 5-year loan at 5.5% interest. They would then have a monthly payment of £380, paying back a total of £22,847.
A borrower with a low credit score might be offered a 5-year loan at 13% interest. They would then have a monthly payment of £448, paying back a total of £26,866.
The second person has ended up paying over £4,000 more in interest.
Credit Scores Make a Huge Difference in the Price you Pay for Loans
This is because your credit score is showing your borrowing behaviour.
When you use a credit card each month and pay off the entire balance, you are borrowing money every month and paying it all back.
That makes you a sound bet with it comes to creditworthiness.
This will hold you in good stead when it comes to applying for other types of loans like car loans and home mortgages.
3. Extra Consumer Protection
When you use a credit card to purchase higher-priced goods you can take advantage of extra consumer protection on the purchase.
In the UK you’re protected for most purchases over £100 and up to £30,000.
For example, if you book a holiday using your credit card and the vendor goes out of business, the card company could cover the cost.
This applies even if you only paid for the deposit using your credit card.
In the US most card companies also offer some form of purchase protection.
If you purchased a good and it breaks, and the vendor is refusing to offer you a refund, you can just raise the issue with your credit card company.
They’ll issue you with the refund right away and then take it up with the vendor on your behalf. This saves you a tonne of hassle.
4. Most Credit Cards Offer Rewards and other Freebies
Many credit card companies offer enticing loyalty programs that offer cash-back or vouchers for things like hotels or airline tickets.
Depending on how much you spend, these could be worth hundreds per year.
So when you use credit cards to do your regular shopping you are taking advantage of free stuff.
So What are the Downsides of Credit Cards?
Now that we’ve heard all the good stuff, let’s turn our attention to the dark side of the credit card world.
These downsides are really scary and have caused years of misery to countless families.
You really need to be mindful of them.
1. The Interest Rates Are Astronomical
Credit card companies are a profit-making venture, not a donkey sanctuary. Their primary motivation is for their benefit not yours.
As well as charging the vendors a percentage commission for point-of-sales made using credit cards, they also make a profit from you, when you don’t pay off your full balance at the end of each month.
And the profits are high my friend. The average interest rate on credit cards in 2023 was a whopping 25%.
An Example
You spent $500 in December to make a memorable Christmas on your credit card.
If you only paid the minimum balance of $12.50 at the end of the month, it would take you 6 years and 10 months to pay that $500 off.
You would wind up paying back a total of $983!
It would cost you an extra $483 on top of the original $500.
That is almost double what you borrowed in the first place, and over half a decade of debt!
The Key Take-Away?
If you don’t pay off the balance in full at the end of the month, you are not using the credit card wisely.
Credit Cards Are Easy to Get Hold of and Hard to Let Go Of
So many people in the UK and the US find themselves in drowning in debt, all because of credit cards.
They’re available in stores as store cards with enticing introductory offers.
They come re-approved in the mail. You might be offered one when you open a bank account.
Using a credit card may offer the advantage of a magical holiday for the kids, or the peace of mind for emergency car repairs should you need it.
All that stuff sounds amazing, but once the money is spent it must be paid back. At 25% interest, you might find it hard to shift that debt.
Bank Loans: boring, but dependable
Compare that to taking out a bank loan. You have to fill in pages of paperwork, and explain why you are borrowing the money.
There is no option to pay just the minimum balance, and you are tied to a payment plan over the length of the loan.
It’s generally a much more rigid way to access credit. There are more hoops to get through to borrow money with a bank.
But the interest on a bank loan is much much lower, say 5% compared to 25%. Another advantage of a bank loan is that you are more ‘supported’ with the debt.
The bank is more motivated to ensure that the loan is paid off in the fixed period that you have agreed at the outset.
With a credit card, you can keep adding to that loan by continuing to spend spend, spend!
The card company will happily let you use a credit card to their advantage and accumulate thousands and thousands in debt. Just as long as you pay that minimum balance every month.
So How Do You Know If You’ll Be Able to Use A Credit Card Wisely?
The formula to consider when deciding whether to keep a credit card in your purse is the rule of three.
3 times it makes to Use Credit Cards
If one or more of the below criteria fits your situation, then it is a pretty safe bet to say that you’ll be able to use the credit card wisely, if you take heed of the warning notes above.
Rule Number 1: You can treat it like a debit/charge card
If you can keep your credit card spending within a limit that fits your budget, and you can pay it all off at the end of the month
You’re basically using it as if it were a debit card or a charge card
I have mine set to be paid off in full automatically by direct debit. That way I’m never tempted to pay any less than the full amount.
I also have alerts set to warn me if I am going anywhere near the maximum spending limit of what I can afford each month.
I act as if the lending part of the credit card doesn’t exist, but take advantage of all the other perks
This way I use my credit card wisely. I even use my credit card to pay bills by direct debit to collect more loyalty points!
So if you’re using it just like a debit card, what’s the point of even having a credit card I hear you ask?
Well, apart from the loyalty points, it’s to build up a good credit score.
When it comes to credit cards I carry a Tesla, I use it like a Honda Accord, and plan on driving off into the sunset with the Lamborghini of credit scores my friend
: )
Rule Number 2: You have a Guaranteed Cash Injection Coming Soon
When I moved into my current home, I was waiting on a rebate of my stamp duty (home buyer’s tax) from the government.
I knew that I was eligible for this tax rebate and that I’d receive it within 12 months.
So I applied for a credit card that gave me 0% new purchases for 12 months and I used the credit card to buy furniture for my new home.
In this scenario, I felt that I using the credit card wisely, even though I didn’t have the money to pay the balance off in full at the end of the month.
I carried a credit card balance of about $5,000 for about 6 months.
To Put it a Better Way, I Borrowed the Money from the Credit Card Company for 6 Months
They weren’t charging me any interest at that time because it was during the ‘0% on purchases‘ offer period.
Sure enough, my tax refund came through after five months and I paid the loan back in full straightaway. There was no way I was going to be trapped into paying 25% interest on that loan!
It takes discipline to do this however.
If you think you will be tempted to spend the money elsewhere and wind up in credit card debt, steer clear of this strategy altogether and avoid the temptation.
Rule Number 3: You’re Making a Large Purchase and Want the Purchase Protection
This rule is kind of a mix of rules 1 and 2 but I listed it out separately for those of you who don’t want to use the credit card like a debit card (rule 1), or don’t have a cash injection coming up (rule 2).
Credit card companies offer an extra level of consumer protection for large purchases.
This is handy if something goes wrong and the vendor is being a pain in the proverbial about it.
If you have the funds to pay for the item then it makes sense to use a credit card to buy it and take advantage of this consumer protection.
You can even take advantage of some cash-back or other loyalty points if the purchase is big enough! This way you are taking advantage of the perks of a credit card.
Remember, this is only worth it if you can pay the balance in full at the end of the month.
The purchase protection is not worth more than the 25% interest to borrow money from the credit card company.
The same goes for points and loyalty programs. Don’t get caught up in the hype, points are only worth pennies on the pound at best.
2 Times You Need to Cut Up Those Credit Cards
This leads me to the 2 times when it does not make sense to use credit cards. If any of these 2 scenarios below apply to you, then you need to cut those cards up ASAP.
Reason 1: You’re Using Your Credit Card Like a Debit Card…But You Already Have Credit Card Debt
What do I mean by that?
Let’s say you have $3,000 of credit card debt.
You may be paying that debt off bit by bit each month and feel good about getting it to zero at some point in the future.
So you keep using your credit cards, effectively for day-to-day purchases. You’re paying off any new transactions at the end of the month. Good job.
You get to collect points, right? It’s good to have that spending cushion at the end of the month, that psychological safety net, right?
Plus, there are always those unexpected large purchases where the credit card can come in real handy.
The car repairs, the amazing bargains in the sales that actually save you money in the long term.
Then there is the crazy expensive wedding of your best friend that you just can’t scrimp on….
Wrong! DO NOT KEEP USING THOSE CREDIT CARDS. They are a honey trap!
Your House Is On Fire – Cut Up the Cards
Credit card debt is pernicious. It gets under your skin, burrows down and stays there.
It takes minutes to tap the card on the reader, but once you get into debt, it can take years to shift it.
Years of money down the drain in interest payments. Money that should be spent on yourself, your wellness, and your happiness. Money that should be going towards your future, your kids, the things you love.
You can’t change what has happened in the past, but you can stop the bleeding and change your future. One step at a time. But you must rip the band-aid off.
If You Are in Credit Card Debt You Must Get Rid of Credit Cards
Credit card debt is a house on fire, and it needs drastic action to put the fire out. The first step is to get rid of the cards.
I repeat: if you have credit card debt, you cannot use credit cards wisely. you need to get rid of all of your credit cards.
Make yourself a $3,000 emergency fund to take care of those things that can come out of left field. You got this!
As for all the other excuses you give yourself for having a credit card? I get it, change is hard.
You are doing the best you can. You are reading this and that shows that you want to do better.
Just be honest with yourself. Do you absolutely need to buy that sale item? Will your best friend understand your need to be debt-free if she is a genuine friend? You can do this, one step at a time.
Reason 2: Spending on a Credit Card When You Don’t Have the Funds Even if it is 0% Interest or 0% Balance Transfers
A 0% on purchases offer is when you can use the credit card to make purchases and not have to pay it back for the duration of the deal period.
A 0% on transfer balances offer is when you can transfer the balance of debt on one card to another credit card without paying a % fee (although there may be a one-off fee).
You’re essentially moving debt from one card to another, maybe to move from a higher interest rate card to a lower interest rate card.
Take My Advice, Avoid These Like the Plague
A cautionary tale from my own experience.
The year after I graduated from college a friend told me about the 0% purchases and 0% balance transfer credit card deals that were kicking about at the time.
I thought ‘Wow, £3,000 for FREE – Amazing or what! (spoiler alert-it was not amazing).
So, I got myself a credit card and I had a spending ball.
After the six-month period ended I transferred the balance, and then transferred the balance again, and again, and again.
Only the magic ended abruptly at the stroke of midnight when the balance transfer deals stopped being 0%.
The credit card companies started slapping balance transfer fees on of £50-£100 a pop.
From Posh Nosh to Pot Noodles
Suddenly I found myself struggling to keep on top of my household bills, let alone actually eat into the £3,000 ‘free’ credit card debt.
Bear in mind my salary at the time was £17,000 before tax and student loans!
I was lucky that there was still no credit card interest to pay.
But I had the threat of the 0% interest deal ending at any moment as well as the pressure of figuring out how the heck to pay the debt off.
The crappiest thing of all was that I didn’t have anything to show for the £3,000 that I had spent.
I hadn’t been intentional about my spending, but I was having to be as intentional as heck now that I was broke.
I hadn’t used credit cards wisely at all. It was a big wake-up call.
Don’t Step Into The Cage – Avoid Avoid Avoid!
So the lesson is this: there is no such thing as a free lunch.
These introductory offers are there to keep you on as a long-term client. Do not get trapped in the net my friend.
Only borrow what you know you can afford to pay back.
If you don’t have a clear way to pay back the money, don’t take it. You will avoid a whole lot of pain down the line.
To Sum It All Up…
If you have any credit card debt at all, cut up those cards immediately. Flip over to debit cards and cash.
If you are free of credit card debt and confident that you can use them wisely, then they’re a handy way to spend money.
You can also enjoy the additional consumer protection afforded by the credit card company, build up your credit score, and even earn a few gifts.
Be sure to spend only what you have budgeted for and ALWAYS pay off the full balance at the end of the month.
It’s best to set up a direct debit from your current or checking account. This is a great way to use credit cards to your advantage and come out a winner!
Life Is a Marathon Not a Sprint…
Final thoughts: your life situation is going to change as you enter different phases. As such you can review your relationship with credit cards.
Here’s an analogy of a professional athlete. While they are doing professional sports they are burning up to 6,000 calories per day.
During this level of activity, they are going to consume a lot of food that is high in protein, lean fats and carbs.
Once they retire from professional sports they’re going to need to change their diet. If they don’t change their eating habits, they will very quickly find themselves becoming unhealthily obese.
This is the same with credit card usage. If your circumstances do not meet the criteria then credit card spending is simply not right for you at this time, no judgment at all.
What you would then do is review your circumstances in a year and then re-assess if a credit card is suitable or not.
An alternative to credit cards might be emergency funds and holiday budgets. So think carefully before you sign up for those cards and keep them in your purse.
Thanks for reading! Please leave a comment and share your own experience of credit cards.
