I know I once wrote a post explaining why you need to stop using credit cards. That is not entirely true. It is important to understand the risks and dangers of using credit cards irresponsibly, but it is also important to understand and take advantage of the benefits.
Know Thyself
You know your spending history better than anyone else. Only you know what will happen if there is a credit card in your pocket. If you can't control your budget and your spending, that needs to be your first priority. If you can't avert the downsides of credit cards, you are better off avoiding them all together. If you are a bad spender, I suggest getting a couple of no fee credit cards to build your score and using the “ice cube” trick to keep yourself from using them.
The ice cube trick works like this:
Take a plastic bowl and fill it about 1/2 way with water. Put it in the freezer and let it turn into a big ice cube. When it is good and frozen, put your credit cards on top and fill the rest of the bowl with water. Put it back in the freezer. When you are done, your cards will be frozen inside of a big ice cube. You can take it out of the bowl and put it in a big gallon bag in the freezer once it is done.
You can get the cards out without melting the ice, but you can't melt the ice quickly. Putting it in a microwave will ruin the cards, boiling it will melt them and ruin the strip. If you have a big purchase you want to put on the cards, you have to get them out and let them thaw. That gives you time to decide if you really want to do it.
Reason #1: Your Credit Score
The first reason you need a credit card is your credit score. If you in your 20s or 30s, chances are you are renting your home. If you want to purchase a car (with a loan) or buy a house (with a mortgage), you need a good credit score. You probably don't have the $200,000-$300,000 or so in cash for your first home purchase. Do you know the first thing a bank will look at when deciding on a mortgage loan? Your credit score.
A credit score is not born over night. It is not born over a month. It is not born over a year. It takes years to build a good score, tough it can take only weeks to destroy it. I have had perfect credit since I was 18, when I got my first card. In that time, I have used and paid off my cards in full every month. I have taken out a car loan and student loans. I have always been early on my payments. I paid off my car loan and student loans early and have never missed a payment date for any credit card or loan. In fact, I have paid my cards off in full each month and never paid a cent of interest.
Reason #2: The Perks
When I started this blog in 2008, I was hesitant to use my credit cards too much, because I have seen what happens when people spend more than they can afford. Over time, though, I learned that using cards responsibly can lead to good credit, which saves you money on loans in the long run, and some sweet perks.
I recently wrote about my experiences with my favorite credit cards, which I have used to get free flights to Europe and around the United States, free hotel nights, and some other sweet perks, . I used to think that a cash back card was best, because I could use that money to buy a flight if I wanted it.
Oh, was I wrong. The bonuses and perks of travel cards often give you much more than the 1%-2% cash back value you would get from a cash back card.
Your Experiences?
What are your opinions on credit cards? Are they good or bad? Do you think it is worth getting a card for the sweet perks? Please share your thoughts in the comments.
Image by Images_of_Money / flickr
(Originally published October 12, 2008, re-written September, 2012)
I am a huge fan of credit cards. You just need to be smart with them and know how much you are spending. I have traveled internationally for free a couple of times because of the rewards I received.
That’s awesome. Where did you go? I took a reward flight to London, Paris, and Amsterdam in November. That was my first of hopefully many international trips for free.
One trip was to Peru and another was to Costa Rica. I wish I had been in the know about all the tips to get miles before those two trip.
Awesome trips. I was in Costa Rica in January. Peru is on the list.
Credit cards are neither good nor bad. They are a tool. Use the tool wisely and you benefit.
That is a good point. The power comes from the use, they are not inherently good or bad on their own. I like to look at the glass as half full and focus on limiting the downside risks while building on the benefits.
I think they’re awesome and totally worth getting them for the perks. I can control myself so they only benefit me.
Sounds like you are on the right track Lance. What are the best perks you have used so far?
The big perks I use are the 5% cashback and massive sign up bonuses… both are great for me! I haven’t used many of the other perks yet.
I love using credit cards for everything possible (though I admit we only have cash back cards!) now, but for several years I was nervous about it. I guess I took a while to “know myself” so that I could trust myself with credit but at least I didn’t make any mistakes along the way like charging something I couldn’t pay off right away.
Any plans to expand from cash back to other types of cards?
No plans, no. We’ve looked around and haven’t found one we’re confident we would make good use of – we don’t spend very much money, really. We fly several times per year but are not loyal to any airline.
I agree with Marie. Credit cards are neither good or bad – they are a tool that can benefit you or hurt you. (Kind of like an Axe can cut wood so that you can make a fire, or cut your foot clean off.) I use them for the benefits and can’t even count the number of free flights and hotels I’ve acquired by just using rewards cards.
You are totally correct. Glad to hear that you take advantage of the good while avoiding cutting your foot off!