The reality of credit cards is something that many people fail to truly comprehend. This reality is that they can be a huge advantage when utilized appropriately and a huge liability when used poorly.

The level of credit card-related household debt in the United States is at an all-time high. Americans have more than $925 billion of credit card debt, or an average of $5,474 per borrower.

Americans pay $120 billion in credit card interest and fees each year, or around $1,000 per year per household.

If you haven’t noticed, we’re slightly addicted to credit cards due to the convenience and ability to “buy now and pay later”. Banks don’t mind one bit – they’re able to charge interest rates that range on average from 16% – 24% for the privilege of going into debt!

Credit cards can both help and hurt your credit very easily, as well as make or break your budget. While we’re not fans of going into debt, credit cards aren’t all bad and can be used as a weapon if you wield them carefully.

With that in mind, we’ve put together a few rules of combat to follow that can help you maximize their benefits as well as avoid some of the pitfalls…

Treat it Like a Debit Card – Not Free Money

Credit cards are super-convenient, which is precisely what makes it easy to overspend and regret it later.  Credit cards don’t elicit the same emotional response that comes from using cash or a debit card, as we don’t see our wallets or bank accounts diminish immediately.

To avoid this natural tendency to over-spend using credit, we always recommend a few ground rules:

1. Use them in concert with a budget.  Budgets are just pre-determined spending plans, so as long as you’re living within your means via a balanced budget, credit cards tend not to lead to overspending.
2. Always pay off the full balance at the end of each month.  This helps keep your spending in check by seeing what you spend each month, and it also avoids interest and penalties since those are only incurred when you don’t pay them off each month.
3. Don’t allow the rewards to accelerate your spending. They should only be viewed as an additional bonus for the regular spending you would typically make. This includes necessities such as groceries, gas, and eating out. Spending more just to receive rewards from your credit card is a fool’s errand.

Keeping these simple rules will keep you from 99% of the problems that are associated with credit cards!  If credit cards are so fraught with problems, then why even bother?  There are two main benefits – to build credit and to get rewards keeping the above-mentioned rules.

Maximizing Rewards

Most credit cards offer a reward of 1-2% back per dollar spent, whether it’s in the form of cash, airline miles, hotel points, etc.  Certain cards provide boosted rewards ranging from 3-10% if you hit certain criteria or spend on certain categories.  Ultimately, if you were going to be spending the money anyway, you might as well receive cash back while doing so. If you use your credit card like a debit card, focus all your spending on the credit card, and pay off the balance in full every month, you’ll accumulate rewards over time for this small shift in the card you use to spend your money on.

Credit card companies offer introductory offers or sign-up bonuses to entice new users. These can be lucrative, as they may offer free cash back or rewards just for signing up for the card. For example, a card may offer 70,000 points or $700 in cash back rewards when you spend $3,000 in the first three months of using the card. If your day-to-day spending exceeds this amount, you could be essentially getting paid $700 for your regular expenses.

In addition to sign-up bonuses, credit card users can also benefit from boosted cash back rewards on certain spending categories. Two great resources for finding the best credit card(s) can be found at this link or at this link. While one card may offer a flat 2% cash back on all purchases, another card may offer 4% cash back on dining and groceries, 3% cash back on gas, and 6% cash back on travel. By using different cards for different categories of spending, cardholders can maximize their rewards without changing their spending habits.  If you’re willing to keep track of multiple cards and diligently pay them off, you can enhance the rewards benefits substantially.

For business owners, using a business credit card for expenses can also offer rewards benefits. By using a business credit card for all business expenses and accumulating points, business owners can redeem those points for cash back or travel. In some cases, they may even be able to combine their personal and business credit card points for even greater rewards.

Travelers can also benefit from credit card rewards programs. Many credit cards offer high rewards for purchasing travel with the card, and some offer bonuses for redeeming rewards points for travel. Additionally, some credit cards allow users to transfer rewards points to travel partners for even greater rewards. These rewards are increased as often you can get 4 to 6x the points if you take your credit card points and transfer them to a travel partner to redeem. So, if you had 70,000 as in the above scenario, those points might be worth $700 (1% back) in cash, your card may offer the option to transfer them to a travel partner where you could redeem them for a $2,000 plane ticket with those same points.

Every situation is different, and everyone’s spending and rewards preferences are different.  The key is to figure out where you tend to spend money consistently, and lining up the card to accumulate the most points as well as make the redemptions the most lucrative. It’s also important to remember that responsible credit card usage is key to maximizing rewards. Cardholders should never spend more than they can afford to pay off each month and should always pay on time to avoid interest charges and fees.

Building and boosting your credit score

Having a solid credit score is critical for obtaining favorable interest rates on everything from vehicles to homes, and even for renting a property. Using a credit card can be one of the most important and easiest ways to establish and build credit starting out. A credit score serves as a gauge for lending companies, determining whether you are a credible borrower. The most widely used credit score is the FICO score, which is comprised of five main components:

1. Payment history, which represents 35% of your FICO score and indicates whether you consistently pay your bills on time
2. Credit utilization, which accounts for 30% of your score and compares the amount of credit you use to your total credit limit, with lower percentages indicating greater creditworthiness
3. Length of credit history, comprising 15% of your score, measures how long you have used credit, with longer histories indicating more credibility
4. New credit, worth 10% of your score, evaluates how frequently you apply for new credit and the amount of credit derived from recently opened accounts
5. Credit mix, which  accounts for 10% of your score, with lenders preferring borrowers who have a variety of credit types.

Maintaining a strong credit score requires effort and attention, but it can pay dividends in the form of favorable interest rates and other financial opportunities. By understanding the factors that comprise a credit score and taking proactive steps to build and protect it, you can position yourself for success in the long run by using a credit card. With this in mind, here are a few tactics to consider:

1. Avoid canceling credit cards if they’re not causing problems.  The more available credit you have, the higher your score will be.
2. Ask for credit limit increases as the lower amount of your total balance you carry on the card carries weight to your score.
3. Always want to pay off all credit cards before the statement closing date so that it is not reported that you carry an open balance.
4. Don’t open a bunch of cards at once, as this will negatively impact your score.

What to do if you get yourself in trouble…

In addition to building and protecting a strong credit score, it is important to manage credit card debt responsibly. If you find yourself in debt with a credit card, the first thing to do is to stop using credit cards!  Perform plastic surgery by cutting them up.  Give yourself a credit freeze by putting them in the freezer. Reverting back to just a debit card can reinforce the strategy of only spending what one has. While credit cards can be a useful tool when used responsibly, it is important to evaluate personal spending habits to determine if a credit card is right for individual circumstances. If a credit card is likely to cause overspending and debt, it may be best to avoid using them altogether.

Another option that you have is to look into some of the 0% APR credit cards that are out there. These cards will have sign up bonuses where you do not pay any interest for anywhere from 12-18 months. This can be a great option for you as you can transfer your balance from one credit card to another and allows you to focus on paying it off during that time period while you get your spending back under control. Keep in mind that these transfers fees that can be anywhere from 1-3%.

After that, the best approach to paying it off is the “snowball” method. This involves paying off the lowest balances first, which allow you to pay them off quicker since they are smaller amounts. This then frees up the money from those payments to then be allocated to the credit cards with the higher balances, creating a larger and larger “snowball”.

Credit cards can be a double-edged sword – on one hand, they provide a convenient way to receive rewards and benefits. However, it’s all too easy to fall into the trap of overspending and accumulating debt that can be difficult to pay off. As Proverbs 22:7 says, “The rich rules over the poor, and the borrower is the slave of the lender.” the Bible doesn’t prohibit the use of debt, but it gives us a lot of “use with caution” warnings!

By using credit cards like debit cards and only spending within our means, we can avoid falling into the trap of being a slave to our lenders. Remember, credit cards can be a useful tool if used correctly, but if we’re not careful we can become a slave to the lender!

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