Using Credit Cards in a Smart Way

There is much debate about the role credit cards should play in a family’s life and finances.  Some would argue that credit cards do nothing but sink consumers into more and more debt.  After all, credit card interest rates can be among the highest rates we pay on any type of loan, depending on your credit score.  That’s mainly because credit card debt is considered unsecured debt.  If you default on a credit card, banks have little recourse, as they hold none of your personal property as collateral.  That makes them more risky for banks and hence, come at a higher cost for consumers in the form of higher interest rates.

Unfortunately, those that can least to afford these high interest rates are the ones most likely to pay them.  American society and social pressures demand a high standard of living, and those that make less have discovered they can get more “stuff” by simply using their credit cards and racking up the debt to be paid at a later, sometimes much later, date.  Meanwhile, the high interest rate keeps piling on debt and keeps consumers from paying off that balance.

Dave Ramsey, a famous author who broke through on talk radio with the best selling book “The Total Money Makeover” is against using credit cards at all.  He argues on his website:

There is no positive side to credit card use. You will spend more if you use credit cards. Even by paying the bills on time, you are not beating the system! But most families don’t pay on time. The average family today carries $8,000 in credit card debt according to the American Bankers’ Association.

Those facts should be a red flag to every family considering the use of credit cards.  Credit cards can indeed make it easier for families to spend money.  The availability of credit card debt provides an incentive for families to spend beyond their means.  In many ways debt provided by the credit card companies is dangerous to families that are not good at handling a budget or controlling what they spend.

One possible analogy is providing alcohol to a person who has a problem controlling alcohol consumption.  It is not a very smart thing to do.  But does that mean that nobody should drink?  History has already answered that question, and the answer is clear that control and moderation are the keys to having a society that allows drinking.

The same is true with credit card use.  Because some abuse the use of credit cards does not make them something that should not be available to responsible users.  Smart people have learned the secrets of using credit card effectively.  Here are some principles that ensure their responsible use:

1.    Don’t use credit cards if you are living paycheck to paycheck and/or sometimes have problems making ends meet.  The cards will only provide an easy way to spend more than you have and increase your financial problems.  Look to solve those problems in another way, such as increased income or decreasing living expenses.

2.    Create a budget and live by it.  Understanding how much discretionary income you have is the first step in knowing how much you can spend on credit cards.

3.    Only spend discretionary and budgeted income on credit cards. Pay for those items you have in the budget but might normally pay for in cash.  Reward points are also an incentive for substituting credit cards for cash.  These rewards can add up in the form of rebates or credits toward additional purchases, not to mention airline and travel rewards.

4.    Pay your credit card off every single month, without exception.  It is tempting only to pay a portion of your debt off, but that is where some people get into trouble, and the balances begin to grow.  Paying your balance off every week or every month ensures that you remain in control.

When used responsibility, like many other things in life, credit cards can be a useful tool and in some cases earn you rewards that can reduce your overall spending.  The key is understanding if you are responsible enough, based on the guidelines listed above, to use credit cards in a smart way.  Living by a budget, and paying off your balance every month, will allow you to be a responsible user of credit cards.