Law #8: Use Credit Cards Wisely and to Your Benefit
The Law
Having and using credit cards adds a powerful tool to your financial toolkit when you use them correctly. Carrying balances and financing purchases over multiple months is not the way to use them. Rich people don't do that. People who want to be rich shouldn't do that. No one should do that. Live within your means while using credit cards for two simple reasons: (1) record-keeping and (2) earning incentives.
Your Keys to Power
Before we dig in, let's get something clear upfront. We're talking about using credit cards if you don't currently have a lot of credit card debt. If you're starting with credit card debt, a post is coming for you that talks explicitly about managing that debt, getting it down, and becoming debt-free. If you’re starting with significant debt, this current issue is still beneficial for you, even if you may find it hard to implement some of these strategies right now. Always take the opportunity to learn a new tactic, even if you have to delay when you start practicing it.
Pay in full each month. We start with this overwhelmingly ubiquitous advice from the financial elite to pay your credit card balances in full each month. Following this rule is how to use credit cards to their fullest potential. Paying in full each month keeps your history clean, entices credit card companies to increase your limits (which is what you want), and opens the door to new approvals from other credit card companies (also what you want). Spend within only the means of what you can pay in full each month, and don't use your credit cards to finance the gap between what you can afford right now (based on current income) and the life you want to live. Live the life your income, not your credit, can afford.
Find the right mix of credit cards with benefits. An unsecured credit card is the most common type of credit card. Banks and other financial institutions offer them to you without requiring any collateral, such as a deposit, to get approved. Many unsecured cards have lower interest rates, lower fees than secured cards, and amazing rewards programs that you can leverage. It’s these awards programs that you should seek to leverage.
Using rewards cards wisely, you can earn great perks like cash back, free hotel rooms, flight upgrades, and sometimes entire travel packages. Rewards cards generally fall into these categories:
Cash back: This is probably the most straightforward type of rewards credit card. You’ll earn a percentage of money back when you purchase eligible items. Example: You spend $5,000 with a 3% cash back card, and you get $150 in cash back, ultimately making your purchase $4,850 instead of $5,000. (You'll pay the total $5,000 and get the $150 back later.)
Points: These types of credit cards give cardholders a fixed amount of points per dollar spent with the ability to redeem those points for various rewards. Example: You’ve spent $30,000 this year on a card with 5 points per dollar, earning 150,000 points. Your card allows you to redeem one night of a hotel stay per 50,000 points. That will earn you three nights of a hotel stay for a vacation.
Miles: These types of credit cards allow you to earn airline miles for each eligible purchase you make. You can redeem those miles for flights, airport lounge access, seat upgrades, and other travel perks. Example: You’ve spent $30,000 this year on a card that gives 5 miles per dollar, earning 150,000 miles. Your card allows you to redeem a one-way flight for 75,000 miles. That will earn you a round-trip ticket to some destinations.
Some of these cards, particularly points and miles cards, come with additional benefits to cardholders like access to airport travel lounges, flight upgrades, free car rental insurance, etc., depending on the card.
Use credit cards for these two purposes only. Treat credit cards like they are nothing more than record-keeping tools and incentive builders.
As a record-keeping tool, use credit cards simply to track expenses. For instance, you could use one credit card for all of your fuel purchases and another credit card for all of your grocery purchases. Or travel. Or lodging. You get the drill. Using separate credit cards, you can easily track your total monthly expenditures within different categories. You need to know exactly how much you spent on transportation fuel last month—look at your Chase card statement. If you want to confirm you were within budget on your monthly groceries—look at your Amex.
Use credit cards to earn perks, points, and rewards as an incentive builder. For instance, this card offers 1-2 miles on each dollar you spend, which can help you gain free travel. This card provides 1.5%-6.5% cash back on your purchases, so if you spend $1,000, you could receive up to $65 back, making your purchase cheaper. And this card gives you 2-6 points for each dollar you spend, which you can redeem for free hotel stays at Marriott branded properties. When you use credit cards to build perks, you’ll sometimes use different cards for different purchases. You may need to use your Marriott Bonvoy rewards card at check-in and check-out to get rewards points with Marriott.
Paying your balance in full each month allows you to maximize both opportunities, so be sure to spend only what you would have spent if you didn't have a credit card and were paying cash from current earnings.
Practical Application
Map out your behaviors and then go hunting. Find your correct blend of cash back, points, and miles cards. The specific mix may differ for different people, and the best way to figure out what you need is to map your behaviors. Do you travel a lot? Do you not travel at all? Do you book hotels several times per year? Do you rent vehicles? Make a list of these behaviors and lifestyle choices, and then look for cards that benefit those activities. Once you have some target cards in your scope, check what credit limits those card companies will approve for you and figure out what purchases you can put on the credit cards first and then pay in full each month.
Spend within your means. Always pay your credit card balance in full each month. The only way to achieve this goal is to ensure you spend within your means. Don't use a credit card as a tool to buy things you can’t afford within a single billing cycle or that are outside of your budget based on your current income. If you want to finance something you can't afford to pay for within a single statement, look for other tools like payment plans, layaways, and personal loans. Sometimes you can find interest-free payment options cheaper than using a credit card. Charging only the purchases you can pay within a single billing cycle and what was within your budget in the first place is the only sure-fire way to avoid credit card debt.
Make monthly payments on time. Whatever you do, make sure to make your credit card payment on time. Most financial institutions will let you set up automatic payments, pulling the money directly from your checking account before the payment is due. Never miss a payment.
Keep a low utilization ratio. Just like you want to spend less money than your earn, apply the same concept to credit cards. Use less of your credit than your total credit limit. Even though you'll pay your bill in full each month, avoid using more than 30% of your credit limit. That means if you have a total combined credit card limit of $10,000, only charge about $3,000 per month. Why does this matter, particularly if you will pay the entire balance in full anyway? We’ll dig into interpreting credit reports in an upcoming issue, but for now, just know that credit scoring systems don't like to see more than 30% of your credit card limit used at any given time, even if you are a full statement balance payer. Even though you're going to pay the balance in full, your credit card company may still report your balance to the credit bureaus at times before you have paid the balance. So without knowing all of the details, just trust us, and keep it under 30%. If you want to run more charges through your credit cards than 30% of your limit, and these charges are within your budget, it’s time to get limit increases or add another card or two to increase your total credit limit.
Make credit card terms irrelevant. We’ll never recommend not reading your agreements, but we absolutely advocate making most parts of those agreements irrelevant. The credit card terms and conditions agreements will explain interest rates, how you’re billed, when you’re billed, what happens when you don't make payments on time, credit card fees, etc. Understanding these terms is essential, and we recommend reading your agreements whenever you enter a new one with a credit card company. But most importantly, make most of those credit card terms irrelevant by paying your balance in full each month and never being late. If you are never late and you always pay in full, you essentially make most of what is in the credit card terms and conditions irrelevant. At that point, the most interesting thing for you will be how those credit card terms and conditions apply to the perks and incentives you'll receive, and that's how we like it. If you're reading through the terms and conditions and getting lost in concerns about how much you'll be charged if you pay late, you’re already off to the wrong start, and this game may not be for you right now. Again, we're not advocating for you not to read terms and conditions thoroughly; we're just advocating for you to make them less relevant in ways that you can control.
Maximize rewards. For some, the entire credit card game is all about maximizing rewards. Points toward merchandise, airline miles, hotel stays, exclusive clubs, and cash rewards are hot opportunities. Some credit cards also offer first-time cardholders a sign-on bonus of 5,000 to 150,000 points or miles. A card that offers cash rewards may help you save. If you're spending what you'd planned to spend within your means, you will be spending this money anyway. If you can, you might as well get cash back or rewards on the money you're spending and put it toward savings or rewards that light up your travel.
Authority
“The thing about credit cards is that they assume an importance in our lives that takes them far beyond an innocuous piece of plastic in our wallet, directly to the heart of the way we live. For some of us, they're all about convenience; just another way to conduct financial transactions. These convenience-seekers use credit cards at will, pay them off each month and reap the rewards points. For these people, plastic is fantastic. For a large proportion of us, however, credit cards are the way we fill the gap between the lifestyle we can afford and the lifestyle we actually live. To these people, a credit card is a ‘frenemy’, loved and hated in equal measure. The trouble is that once you get used to the idea of supplementing your income with someone else's cash, it becomes a difficult habit to break. So we love the card for its access to what we think of as ‘life’, but hate it because those bills roll around with monotonous regularity, reminding us of our excesses.” - Allison Tait
“Stores are never nice to people. They're nice to credit cards.” - J.F. Lawton
“These days using a credit card is like going to a Las Vegas casino. No matter how clever or responsible you are, nine times out of ten, you are going to lose, and the company is going to win. Managing your finances shouldn't be a gamble. The deck shouldn't be stacked against you.” Chellie Pingree
“People who recognize that money won't buy happiness are still willing to see if credit cards will do the trick.” - E. C. McKenzie
“It is only the poor who pay cash, and that not from virtue, but because they are refused credit.” - Anatole France
“Young people begin receiving credit card applications the minute they turn eighteen. These offers encourage them to have credit cards in order to "establish a credit history." My personal take on this is that there will be plenty of time for that later. I want children to get a good sense of managing the money they do have, living within the budget they've set, saving a little, and meeting their financial responsibilities before they take on credit.” - Susan McCarthy
“The whole point of credit cards, the way they are rendered most profitable, is that we dig ourselves into debt and stay trapped there forever.” - Brett Williams
“Credit cards are a safe way to carry money: They provide a convenient record of all your expenses, and they generally offer relatively good exchange rates.” - Darwin Porter & Danforth Prince
Our Vote
I love myself a credit card. One of my favorite go-to cards is the Marriott Bonvoy card by American Express. Not only is it a lovely heavyweight card, but it also packs a punch with the points. Every year, the level of spending I run through that card (about $170K in 2021 alone) covers 2-3 weeks of accommodations for a three- to four-week vacation. And we're not talking about your basic, run-of-the-mill properties. We're talking about higher-end, multiple-bedroom suites in lovely places like this Ritz Carlton in Waikiki last year.
I'm also a fan of cash back rewards. I use my Apple titanium card for expenses I want to keep separate, and I earn up to 3% cash back on purchases, mainly Apple purchases, because I’m an Apple nerd with gadgets and apps. As of right now this year, I've racked up a little over $500. The cash goes to my Apple Cash account, and I'll eventually move it into my savings account.
I have several other credit cards I don't use often, but I hold onto them because they come in handy. First, they increase my total credit limit, which helps me stay within 30% of my credit utilization ratio overall. I also use them for the benefit of simply being a cardholder. For instance, I have a Delta SkyMiles Platinum American Express card that gives me benefits and perks at certain airports and whenever I choose to fly Delta, although that's not so often these days.
Sometimes I'll apply for a new credit card because there’s an excellent welcome gift I receive, sometimes without any requirement to even use the card very much. I love taking advantage of these types of opportunities.
I use my cards for simple record-keeping purposes, discounts, and credit-building capacity while earning great incentives. I definitely support having a curated grip of credit cards in your pocket.
No matter what, I pay the balance in full each month. I haven't always been like that, but I've certainly learned it’s the best way. It keeps me accountable and honest about my means. I'm spending within my means if I can make the full payment within the billing cycle, and I make sure I don't inflate my purchases and get more things just because I'm using a credit card and not currently earned cash.
Using credit cards strategically also helps me quickly check the status of my budget categories. I like that kind of accountability. As long as you’re staying accountable to your means, if you can run the charge through a card that you’ll pay in full anyway, do it. You’re going to spend the money anyway. You might as well earn something on the backend for spending it if you can!
Reversal
You don't have to have a credit card. They are great tools, but many a great life has been lived without using credit cards. Sometimes, your best credit card advice is to avoid them altogether. If you just can't get spending under control, you’re addicted to spending or shopping, you’re impulsive when that little plastic baby is in your hands, you have poor spending habits, or you just won't pay the bill, your best bet is to avoid the credit card. And that's OK! While you’ll miss out on some of the benefits of having these tools like record keeping and building incentives, you'll gain the freedom of not being enticed by something that can become addictive.