If you’ve read any of my books or listened to The Casey Lewis Podcast in the past you know that I have taught the best way to use credit cards is to never use a credit card. Don’t touch them. Cut them up. You don’t need them. That’s been my financial advice for the better part of a decade. And in most cases, that advice has been spot on accurate. In some cases however, that advice has been wrong and possibly even detrimental.
Nobody that has a mountain of credit card debt ever intended on wracking up bills that they couldn’t pay. Of the hundreds of clients I’ve coached through paying off their credit card debt, very few can point to exactly which purchase or purchases caused their financial issues. The vast majority of credit card debt I encounter comes from the irresponsible use of swiping a piece of plastic, using the cards as a replacement for emergencies, and not having a strategy in place to be intentional about using credit cards as a financial tool.
But there are several advantages to using credit cards wisely as a financial tool that can’t be ignored.
Credit Cards are the fastest way to boost or improve a credit score.
I have documented my financial collapse during the Great Recession quite well. Not using credit cards wisely played a large role in my personal financial struggles. My instinct was to eliminate them entirely, call them evil, and never touch them again. For years, that was my path and advice. It worked! We became debt free quickly and began to build some wealth. Everything was going great until about 5 years after our financial recovery when we were ready to buy a new house. We were consumer debt free, hadn’t been late on our mortgage in years, had great cash reserves in the bank, had a 25% down payment, and our new mortgage payment was less than 20% of our gross monthly income. Under almost all circumstances, we’d be easily approved for a mortgage. The problem, our financial collapse from years before was still negatively impacting our credit score. From the perspective of the banks, we had not “re-established” after our collapse and our current credit scores were too low to qualify for a mortgage and because we had credit scores we were ineligible for manual underwriting. What solved this problem was me walking into my local credit union with my terrible credit score, asking them to look at my checking account history, and asking them to give me an unsecured credit card with a $200 limit. This one action caused my credit score to climb by 200 points overnight and we could then qualify for a mortgage.
In general, I do not care about your credit score. Your credit score is just an indication of how well you manage debt and has nothing to do with how successful you are financially. If you live a 100% debt free life for long enough, your credit score is going to become zero. But if you already have a credit score today, it is going to take many years of being debt free to get your credit score to zero. Even if you are able to successfully get your credit score to zero and then do a manual underwriting process for purchasing a home with a mortgage, you will then have a credit score generated because of that mortgage. So all of the work to eliminate your credit score gets wiped out the second you get a mortgage. The only way having a zero credit score makes sense is if you intend on never borrowing money for a mortgage and paying cash for real estate and every other purchase forever. For everyone else in the world, your credit score becomes an important factor in getting a mortgage, the interest rates you’re charged for that mortgage, the premium rates you’re charged for various insurance products, and even can impact security clearance for some employers. Responsibly using credit cards has a huge positive impact on your credit score.
Credit Cards have many built in financial protections not available with cash and debit cards.
It is true that many studies show swiping a card causes you to spend more on purchases than if you were to use cash. It is also true that a debit card can be used for most every purchase the same way a credit card can be used.
While travel has become easier with a debit card, it is still not convenient. Hotels and rental car companies place large holds on the cash in your account for the duration of your trip. Even if the cost of your hotel or rental car is only a few hundred dollars, many of the company policies require holds of $500+, limiting your access to the cash in your bank account until the holds are removed at checkout.
Further, should your debit card be stolen and used by the thief then the cash in your bank account is immediately drained. You have to dispute the charge and the bank will investigate the fraud prior to putting money back in your account. This leaves your bank account without available funds, which could then negatively impact your other financial obligations including automatic bill pay and automatic investing. Your bank can take several days up to several weeks to resolve the fraud and restore everything back to normal. With a credit card, your money is protected and you are not responsible for any of the fraudulent activity. The credit card company works behind the scenes to resolve the disputed items but your day-to-day spending and financial transactions are not negatively impacted.
In the same way, using only cash for purchases isn’t nearly as secure due to the potential of theft or misplacement of the money. Even misplacing just $20-$40/year offsets the potential benefits of cash spending versus credit.
Many credit cards come with bonus financial protections such as automatic extended warranties on purchases, trip protection for travel booked using the card, and consumer protection on various types of purchases.
Credit Cards make tracking your spending more efficient
Categorizing your spending is one of the best ways to manage your monthly budget. Most credit cards give you the ability to categorize all of your spending transactions automatically and then give you a detailed report each month of how you spend your money. This eliminates the dozens of transactions that go through your checking account and give you one location to easily track your spending and compare it against your monthly budget.
Airline Miles, Reward Points, and other incentives
You are not going to get rich off of airline miles or reward points. You shouldn’t make your spending decisions or long term financial planning based on various rewards programs offered by credit card companies. I will say that the various rewards programs and cards available can make things like travel more affordable and within reach for the average person. Even just putting your monthly utilities on automatic bill pay with your credit card results in thousands of airline miles a year which can pay for a flight or two annually.
So, what is the best way to use credit cards?
In light of my past struggles with credit card debt, my experience of coaching hundreds of families out of credit card debt, and the benefits of using credit cards wisely I’ve come up with some rules on how to responsibly use credit cards:
- Never use a credit card if you have any outstanding consumer debts.
- You must have a monthly budget and systems in place to track your spending versus your monthly budget on a regular basis.
- Have a fully funded emergency account of at least 3 months of your GUTS (Groceries, Utilities, Transportation, and Shelter) set aside.
- Never make a purchase on your credit card unless you have the cash in the bank to be able to pay for the item with cash instead.
- Never pay credit card interest, late payment fees, or carry a balance. Be overkill about paying off the credit card account in full every month, or even as frequently as once a week.
- Do not open multiple credit card accounts. Choose 1 or 2 cards and keep those accounts open for a long time. Do not get enticed to open new accounts for their reward programs or introductory offers. Do not open store specific credit card accounts just to save $35 on your purchase.
- Do not move credit card debt around from account to account taking advantage of the various 0% balance transfer options. Payoff the card in full every month and don’t carry debt.
- Do not exceed a credit card balance of more than 30% of the credit card limit. This will negatively impact your credit score.
- Do detailed research on multiple types of cards prior to applying to make sure you understand all of the card benefits that are available to you and that you can utilize those various offers to your benefit. You will have this card in your wallet for a very long time, so make sure you get it right up front.
- Automate the minimum payment. Yes you are going to be paying this card off in full every week or every month. But life happens and something may happen where you forget. Missing a minimum payment will due far more damage to your credit than any benefit you could ever get from having a card would achieve.
The last and probably most important rule for the best way to use credit cards is that if you mess up on any 1 of these rules above then you should stop using your credit card and go back to using a debit card and cash. Nobody that ever ended up in credit card debt intended on being in credit card debt. It’s debt by a thousands swipes. But if you can be intentional, proceed with caution, and understand the potential risks, then you also can take advantage of the benefits that using credit cards wisely as a financial tool will provide for you and your family.