Credit Wise – Using Credit Well Part 1 – Credit Cards

There are people out there, even finance gurus, who will tell you that credit is unnecessary. That you do not need to have a credit score in this society, and that you should avoid any and all forms of credit.

I disagree.

Although credit can be very dangerous, if used correctly, can be a great tool in your financial belt. For those who struggle financially, it can be a very slippery slope with credit products. This is why many finance gurus teach anti-credit practices. They believe people cannot handle credit well, so they should not handle it at all.

Instead, we would like to teach you to use credit wisely. That is what this series of posts is all about – being Credit Wise. This first post delves deep into the proper use and understanding of using credit cards. There are ways to use your credit cards, without hurting your budget.

Over the years, I have had the pleasure of working with many individuals, and help them get back on their “Financial Feet.” Some of the best clientele were young adults, especially those who I had known through working with their parents. The biggest reason I enjoyed working with them was the blank slate and the innocence which came with turning eighteen. Their financial future was still undetermined, and they had not incurred thousands of dollars in debt, yet. I would help them get their finances started, including the creation of their first credit card. With every eighteen year old, I would give them my one and only rule and advice. It was simple, Do Not Spend Money You Do Not Have. Simple as that. Just because you have a $500 credit limit does not mean you have $500 cash in the bank. You should make small purchases, such as fuel, and pay it off every month. There are benefits to having a small rollover balance, but this is not a habit to teach a young impressionable adult.

For those who are tenured in credit, there are great uses for a credit card, especially those with high dollar amounts. One example would be to use your credit card as a protection or safeguard when making big purchases; for example, a vacation to a five-star resort. It will cost you $300 a night, for 6 nights. Thus, your total cost is $1,800. This price tag is acceptable assuming you have the whole cash value in a checking or savings account ready to pay it off (this is a separate account dedicated for the trip). The benefit of using your credit is trifold. Your resort is going to charge you a booking fee at the time of reservation, usually the first night’s stay. Great! They put a hold on your card for $300 (not all hotels do this, some simply charge you). However, your trip is six months from now… If you were to use your primary debit card, that hold would be sitting on your primary account for months on end. If this hold or charge was on your credit card, it won’t be a detriment to your monthly finances. Granted, if you are saving for this trip, you can easily move money in accounts to avoid any problems. Doing this would not benefit your credit, as you are using a debit card.

Another benefit of using a credit card for vacation is the “incidentals” charge. This value depends on the resort, but most charge per day. So when you check in, they authorize your card for the $1800 stay, plus an additional $100 per night for incidentals. The incidentals charge is another hold, on your card. As long as you do not destroy anything or steal anything from the room, this hold will fall shortly after you check out. Your credit card now reflects a $2400 charge. Since you are using your credit card, your liquid cash is not being affected. However, it is likely a $2400 charge on your primary checking account would be a much larger detriment.

There are other benefits to using your credit card in this situation, but the last one I will mention is the rewards. Most credit cards these days have some kind of rewards or cash back set up to entice the user to spend more money. If you have the ability to use this type of card when booking a vacation which you know will be paid off shortly; this is free money. It probably will not be a huge sum of money, but you still making money through spending it.

The vacation scenario is exactly what my wife and I do when we go on our vacations. We do not keep balances on our credit cards, so we can afford to put the entire trip on one card. However, just as I have mentioned multiple times, going on a trip is predicated on the ability to pay the entire trip in cash. We save for our vacations and have the cash in a separate account ready to be used to pay off the vacation. We get the rewards, we help our credit, we have a great time, and we eliminate the credit card debt almost immediately after creating it. The benefits are amazing!

Yes, many other gurus might dissuade you from using credit cards because they think you can’t be trusted with them. However, this isn’t going to stop you from wanting or needing to use them? I would rather help educate you in a manner of responsibility and promoting credit wisdom. Credit cards are not going away. They will only become a bigger part of our financial lives. Learn to use them wisely, and they can greatly benefit you!