We realized we need to step back a minute and explain why we think that not only are credit cards not bad, they are REALLY good.
Take a deep breath all you Dave Ramsey disciples and just stay with me here.
First, here are the take away points from this post:
- Credit Cards are only bad if you don’t pay off your balance in full each month. If you can do this, THEY WILL ONLY BENEFIT YOU!
- Your credit score is a number which ranks how financially responsible you are.
- Paying off your credit card in full each month boosts your credit score
- The better your credit score, the easier you will be able to get loans (think houses, cars, starting a business, etc.)
- Credit Card companies want you to use their cards so they offer incentives
- These incentives can help you travel the world & earn a lot of other free stuff!
- Credit Cards are only bad if you do not pay off your balance in full each month.
- Credit Cards are only bad if you do not pay off your balance in full each month.
- CREDIT CARDS ARE ONLY BAD IF YOU DO NOT PAY OFF YOUR BALANCE IN FULL EACH MONTH.
- Credit cards are really, really good otherwise 🙂
Now, the details:
When you swipe that pretty little rectangle of plastic you are basically paying for your purchases with the credit card company’s money. Unlike a debit card, cash, or a check, the money isn’t taken straight from your personal bank account. The credit card company pays for your purchases. So every time you swipe you are basically taking out a little loan. This is where people get a little scared, loans means you owe others money & usually with interest, right? Right. HOWEVER…you typically have around a month to pay back the credit card companies. And, if you pay back in full & on time, THERE IS ZERO INTEREST! If you pay your credit card off in full each month there is no difference than handing a cashier cash for you purchases (well, other than you get free stuff out of get, keep reading ). Not only this, but by buying things on credit, you then can establish credit. Plus, paying back on time makes your credit score go up (we will talk more about credit scores below) But, here is the other “HOWEVER”: if you do not pay your credit card bill off in full each month, interest sets in…really, really high interest! For homes, cars & student loans, interest rates are usually not more than about 6-7%. But credit card companies charge an average of around 18-20% (that is a LOT). And if you miss a payment not only do you end up paying 18-20% more on your purchases, your credit score goes down.
What is a credit score?
A credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of an individual. … Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits.
So, your credit score is basically your rating on how financially responsible you are; The more responsible you are (i.e. having a credit card(s) for a long period of time & paying them off in full each month) your credit score goes up. Below is a chart of what the range of credit scores looks like (taken from creditsesame.com; lots of good info, check it out if you have a min!)
In today’s world they take your credit score into account heavily when you are applying for loans. Because, like mentioned above, each swipe with a credit card is basically a small loan. So, if you can prove you are responsible & pay back each of those small loans in full & on time, when you are applying for a big loan (house, car, etc) you will have a much easier time getting approved for a bigger loan! In fact, I know quite a few people that had no credit (never owned a credit card) and got turned down for a loan because the loan officers had no proof how financially responsible they were! So even if you have a lot of money in the bank, if you are looking to buy a big purchase item that you need a loan for, you might not be able to get a loan unless you have a credit score; Having a good credit score does you wonders these days.
Doesn’t opening a lot of credit cards negatively affect your credit score?
We get this question a LOT. This is probably the main reason people are scared to apply for credit cards & try “credit card churning” to keep getting sign-up bonuses (which is where you get the big points for travel!) Yes, when you apply to a credit card they do something called a ‘credit inquiry’ which is when they check your credit score which makes your credit card score go down about 5 points. Here’s another, “HOWEVER.” The more credit cards you have, the bigger line of credit you have available to you (each credit card you get has a specific ‘line of credit’; basically the maximum dollar amount you can have on your credit card balance. I.E. if your credit limit is $5,000, you can swipe it for a $5,000 purchase, but not a $5,001 purchase. Once you pay that $5,000 in full, you can spend another $5,000 on it. Basically you can never owe the credit card company more than your line of credit for their card at one time…hope that makes sense! If not, google is your friend :)) So, the bigger the line of credit you get and you can prove you always pay back in full & on time shows you are really responsible! Basically, it shows that you have the potential to go crazy and max out all your credit cards, but you are financially responsible and don’t. Instead, you pay each of the credit card companies back every month in full. So in the long run, you prove that you are incredibly trustworthy & your credit score actually goes up! Nate & I started doing credit card churning about 3 years ago and both of our scores have gone from the ‘Good’ category, to the ‘Excellent’ category!
Just a sampling of the cards we have collected over the past few years ha.
But don’t credit card companies have annual fees? Isn’t that expensive to have that many credit cards?
Yes, most credit card companies do have annual fees. HOWEVER, they want people to apply for their cards so they throw in a lot of incentives to get you to pick their card: i.e. they almost always wave the annual fee for the first year AND they give you big sign up bonus points (whether they are the credit card company’s own points (which can be transferred & used a lot of different ways), or airline company points (note: how we travel for free). This is where you have to be on your A-game though. It is unwise to sign up for the card, get the bonus points, and then close the card right away. The longer a line of credit is open the better the gauge they have of how responsible you are. So if you only have a credit card open for a 2 months than close it, it could affect your credit score negatively because they don’t have enough data so see how responsible you were with it. The best thing you can do in this situation to get new credit cards for travel points but also still show you are responsible is to keep it open as long as possible (some parents open credit cards for their children from birth!) But when you want to “churn” through lots of credit cards, you don’t want to have a lot of $100+ annual fees to pay every year! The key to credit card churning is to avoid the annual fee but still keep your credit score strong is to have your credit card open 364 days & then cancel it. We have quite the spreadsheet showing all the credit cards we open, the points we received from them, and the dates we need to cancel them before owing the fee. As soon as we get a card, we put a reminder in our phones for when we need to cancel them!
I should mention, most credit card companies won’t give you the bonus points right away. You usually have to meet a certain spending requirement (they get you to actually use their card. Annoying, right? ;)) before the points are rewarded. It’s usually a maximum of $3,000 in the first 3 months. Usually once we hit the requirement & get the points awarded, we move on to another card. If we aren’t trying to save up travel points we do have a couple cards that we keep long term (ones that don’t have annual fees) that give cash back. We are currently using a card that gives us 2.5% cash back on EVERY purchase. So basically every single thing we buy is 2.5% off. Which doesn’t sound like a lot, but it adds up fast! We will do a post later on the best non-travel credit cards that give you perks like this 🙂
In summary: YOU NEED A CREDIT CARD!
But really. If you can control yourself & be responsible and never spend more on your credit card than you can pay back each month, you definitely need a credit card! You could be earning free trips, free money, & countless other perks, all while spending the same amount of money you would spend if you used cash on every purchase.
Again, I emphasize the importance on BEING RESPONSIBLE with them! If you know you will go crazy with a card & spend more money than you can pay back each month then credit cards are not for you. Paying that 20% interest rate is just not worth it.
my last, HOWEVER!
If you are responsible, tune down Dave Rasmey & start signing up for some credit cards! Not only will you be in a much better standing if you ever need a loan or other financially help, you can get a lot of really cool free stuff along the way! Take advantage!
-till next time-
Do you have a credit card? Why or why not?
What credit card are you currently using?
Any questions for us?