The Upside of Credit Cards
Posted by Gail | Filed under Credit Wise
I was browsing around on the internet the other day when I came upon a personal finance blog from a while back that said:
Television programs like ‘Til Debt Do Us Part’ etc. often demonize credit cards as an evil that causes debt.
I beg to differ. I have always held that credit cards are a tool. The people who misuse their credit cards don’t have the discipline to use them to their advantage. And the people who give out credit cards often do so without following good lending criteria designed to minimize the risk of putting credit in the wrong people’s hands.
But credit cards themselves aren’t evil. In fact, I love my credit card for a whole bunch of reasons:
#1 Since I pay off my credit card religiously, and I have a no-fee card, there is no cost to using my card no matter how many transactions I do. Many bank accounts come with a debit card transaction limit and once you go over that limit, it can get pretty expensive. (There are some accounts that have no limits at all, but they aren’t always convenient for a body to use.)
#2 Using a credit card for all my transactions saves me having to walk around with gobs of cash. Lose a card and it can be replaced at no cost. Lose cash and you’re very sad.
#3 When I work with families, I ask for six months worth of their credit card statements (along with their bank statements) so I can see where their money has been going. The credit card statements show a very clear picture of what has gone where so you can look back and do an analysis of your spending. When people have been spending tons in cash, there’s no telling where the money went unless they’ve kept meticulous records, which most people don’t!
#4 Every penny I spend on my credit card earns me points that I routinely convert into groceries or other items (like my new barbeque) saving me a not insignificant amount of money.
#5 Some credit cards also offer purchase protection, so if the item is lost or stolen within a specific period – usually 90 days – the card will replace the item. This came in mighty handy one year when I lost my cell phone while I was on book tour our west. Others offer travel insurance of all kinds that can save you big bucks on everything from travel medical coverage, to collision coverage on a rental car, to trip interruption or cancellation coverage. And then there are all the free flights you can rack up just by signing up for the right card.
#6 Traveling with a credit card beats the b’jezus out of pulling money out of foreign ATMs and racking up huge fees. I also travel with a couple of hundred in cash, and then use my credit card for absolutely everything I can. When Alex went to Europe last March on a school trip, she couldn’t help but use cash since she didn’t have a credit card (she’s under age). Each withdrawal came with a hefty fee.
#7 As soon as she’s old enough, Alex will have a credit card so she can practice using it wisely. Why? Well, using a credit card and paying it off in full every month is one of the best ways to build a great credit rating, which will be very useful when it comes to apply for a any kind of future financing.
Credit cards aren’t for everyone. According to the Stats Man, the country’s outstanding credit-card balance has more than tripled, to almost $40 billion, in the last 10 years. So while credit cards can be a terrific tool for the people who have the discipline to use them to advantage, there are a lot of folks out there who have fallen into debt traps using credit cards.
The best way to use a credit card without falling into a debt hole is to only spend money on the card that you know you can pay off when the bill comes in. That means keeping track of how much you’re spending every time you whip out the card.
Keep a notebook with a running balance of what’s in your bank account. Each time you use your credit card, deduct the amount you have spent – as if you’d done a debit – from your notebook. Then, when the bill comes in, you’ll have all the transactions already debited from your balance, so the money’s there to pay off the bill.
June 30, 2009 at 6:56 am
I agree 100%…if used correctly a c/c can be a GREAT thing…I have one that earns me travel points…I use it for everything!!!!!!…and I pay it in full each and every month…I keep track of what I spend so I know the kind of bill to expect…I also keep the limit down to where I know that even if it was racked right up I could still pay it in full..so, no temptation to overspend with the c/c and when I am ready to go back to Europe again in 2010 I will have a nice chunk of travel points to cash in…and yes,rest will be paid for in hard earned saved up CASH!!!..lol..
June 30, 2009 at 7:01 am
Very good rules to live by. I personally transfer/pay my credit card at the end of every week. So if I spent $100, I transfer the payment. By the time I get the bill, I see all of my credits and debits and usually don’t have to pay anything.
June 30, 2009 at 8:01 am
I LOVE my Canadian Tire mastercard. We easily earn $20-$30 a month on it just for using it for everday purchases. I love when i get anywhere from 6x-10x cdn money at thier gas bars.
I use it for everything, but I always pay it off. Usually I pay it off on Fridays (I get paid Thursdays) for my week’s purchases. Credit cards can be a wonderful tool when used properly. I also like that it gives one basically free money for a short period of time. (Exmaple. I went to the dentist last week, was $228.00, I have benefits, but have to mail the form away. I paid the dentist with my credit card, mailed off the from and will pay it back when I get my check from Blue Cross. This way I am not out thet money while I wait for my check)
June 30, 2009 at 8:09 am
Although I agree with your comments, I would like to provide an addititional comment about #7.
I had had a credit card for well over 10 years maybe even longer. However, I had NEVER held a balance. Never. It was always paid in full each month
Anyways, the day I walked into a dealership wanting to replace my very tired old car, I was told that I could not get a loan because I had NO credit history. I was stunned. I had had a credit card for years – how could I not have a credit history? I was told that since I NEVER carried a balance I had not established a credit history (I graduated from University with no debt and no student loans). It was like I was using cash or my debt card. But because I had never carried a balance (even 1.00) I had not shown or proved repayment. After I was told this – I understood it but I was stunned that after all those years I had no credit history. I figured that was what I was doing with my CC for all those years.
I was able to lease a car with no co-signer and established some credit by repaying the lease.
I also paid my credit card by 95-98% of the balance and let the other 2-5% ride past the due date by about 2 days and then paid it in full to establish further repayment credit history.
So when you tell your “clients” to get credit card and pay it in full each month – it is great advice expect for those that don’t have a credit history and wanting to build credit because from what I was told, they won’t be establishing a credit history if they don’t carry a balance (even a very small one) and show repayment of the “debt” – albeit forced debt by withholding some funds for full payment. I would never say only just pay the mininum payment but rather leave a very small payment outstanding and then pay it off within a couple of days of your due date.
Right or wrong? I have no idea but this was my experience and granted it was about 12 years ago so maybe things have changed since then. :0)
June 30, 2009 at 8:50 am
Gail: How timely! We too do everything possible by credit card (and pay our balance in full each month) the benefits of collecting points is amazing – insomuch as my daughter’s complete wedding florals – including pews and hall decorations where “paid” by PC points!!! I live by 3 rules each morning – check my credit card statement, check my bank statement and check out Gail’s wisdom!
June 30, 2009 at 9:01 am
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June 30, 2009 at 9:46 am
joanne:
I pay my cc in full each and every month and the credit report shows that cc was payed as per agreement. I have the history and the credit score to go with it.
Pay your balance in FULL!
June 30, 2009 at 9:50 am
By not paying your balance in full every month, you’re charged interest on the ENTIRE amount, not just the 2-3 per cent you left on the card. Pay your balance in full every month.
June 30, 2009 at 9:56 am
Marie;
I agree with you and now I barely ever use my cards but at the time I was shocked to have been told that paying in full would not provide me a credit history. Maybe they were wrong, but it was the dealership telling me that so maybe they wanted to push me torwards leasing instead of a loan, who knows? Again, I didn’t know if it was right or wrong but it was what I was told and after having a 4 yr car lease paid in full I knew I was creating a repayment history. And at the time I wasn’t worried about a few cents of interest on my CC (it was paid 1 to 2 days after my due date like clock work).
June 30, 2009 at 9:58 am
Joanne,
I’ve heard about this issue on other finance blogs. Some people, who, like you, pay their credit card bill in full every month, found out that their credit score was weaker than those who had not paid all their bills on time because – paradoxically, I think – they had no credit history.
I’ve never checked my credit card report, so I can’t speak from experience. However, judging by what I’ve read in the past, I don’t think you’re alone….
June 30, 2009 at 10:05 am
Sloane;
yes interest is billed on the full amount but all those years ago there was very little going on the CC – so about 95% if not more was paid (so well above the minimum payment) and then the rest was paid the day after the due date so there was very little interest billed – I didn’t wait until the next billing to pay it.
All I am saying is be aware of this situation and know that it MAY impact your credit rating. Again, it was my experience and what I was told – I didn’t say I agreed with it and at the time had nothing to base it on. Maybe all those years ago I was naive to believe what they told me but I didn’t have anything to compare it to and hadn’t found Gail at that point! :0) Paying in full is the best policy and should be done!
June 30, 2009 at 10:16 am
We also use our credit card for almost everything (including my husbands travel for work) and pay in full each month. The only problem is that if we haven’t been refunded by my husband’s office in time for the bill to be paid we have to take money temporarily from the emergency fund but that is doable.
Those collecter points really add up, last year we redeemed our points for 1) a last minute ticket for me to attend a family event that we couldn’t have paid cash for at that time and 2) enough Future Shop gift cards to get a computer on the Christmas sales (perfect as our old computer was dying a slow an horrible death that couldn’t seem to be fixed)
The only caution I have about credit ratings is make sure both partners have their own credit history. When I was 19 I could get a credit card but my mother couldn’t as everything had been done in partnership with my father, my mother had to have my father co-sign for her to get a card.
June 30, 2009 at 10:44 am
Well if everybody did what you did with your cc Gail then you would have no need for a TV show or this site.
June 30, 2009 at 11:08 am
There are some things you just can’t buy with cash or debit. If you buy anything online, or if you rent a car, you really need a credit card. As long as you’re using them responsibly they are very handy little things, for sure.
It’s the responsibility part that a lot of people fall down on. We always pay off our balance each month, but I know we’re in the minority. If we weren’t credit cards wouldn’t be nearly as profitable for the banks as they are.
June 30, 2009 at 11:20 am
Does anyone know anything more about the Visa/Mastercard Debit?…
“Good news for Canadians that want the convenience of a Visa or Mastercard, but don’t want to deal with monthly bills, are under 18, overspending, or have poor credit.
Visa and Mastercard are planning on launching debit Visa and debit Mastercards in Canada, perhaps in 2009. These cards will work just like Interac debit cards, whenever you make a purchase, funds are instantly taken out of your bank account and you can’t spend more than you have.”
June 30, 2009 at 12:02 pm
I love credit cards (but I have money in the bank to pay them off).
Most people should not even own a credit card (no discipline).
It all comes back to buying items when you have no money.
June 30, 2009 at 12:02 pm
I am newly into the ‘use the card/pay off the balance’ cycle after years of high balances and a whack of interest. It takes a bit to get used to using it and not being afraid of that giant amount due at the end of each month, because I pay it off as I go. I am enjoying the airmiles I get with mine and I hope I can continue this healthier pattern of credit card use.
June 30, 2009 at 12:10 pm
I love earning grocery points to use for buying groceries but, truth be told, it is too easy for me to go over what I should be spending in a month. I am trying to limit my credit card use.
June 30, 2009 at 12:49 pm
Rachel, what do you want to know?
Americans have had “debit credit cards” for years. It basically works the exact same as our Interac system, but has a Visa or Mastercard logo on it instead and may have associated fees. Since Americans have a different banking system than us (hundreds of little banks, who often don’t let you use a different banks ATMs), it was a useful product for them.
Personally, I think for Canadians it will mostly be useful for those people who CAN’T or WON’T get a credit card, but want to make purchases where a credit card is required (ie, online)
June 30, 2009 at 12:55 pm
Joanne, I worked in the finance department of a car dealership for 8 years, if you have a credit card it shows up on your credit history regardless of whether you carry a balance or not unless there was a problem with your bureau. They were not being truthful with you in saying that was the reason. It is more likely, if perhaps this is the only piece of credit, no other cards, no loc, no previous auto that your credit wasn’t “enough” to qualify on your own. It’s not unusual for first time car buyers to require a co-signer, your credit must be good or you wouldn’t even qualify with a co. It is truthful that the qualifying restrictions are less stringent on a lease because the ownership remains in the name of the leasing company which allows for easier repossession.
June 30, 2009 at 1:04 pm
Thanks Diane B.
Not really sure what I was looking for in response to my comment. Just wonderng if anyone knew anything more about it. I guess more or less just wanting some info to see if it would be something that would be beneficial to me when it comes to Canada. I already have a credit card but I don’t have one with rewards or any bonuses like everyone here is talking about. I usually only use mine if I order something online, plane tickets, and reservations.
June 30, 2009 at 1:28 pm
Nikiford;
that makes more sense based on what transpired and what you have said. I only had 1 credit card (maybe 2 – can’t remember now and possibly some store cards) and no other forms of credit (in 12 years, that has certainly changed). I didn’t have an original car loan as the dying car was a purchase from my father and I didn’t have any student loans. Likely, the credit I had was good but like you said there wasn’t enough and that is likely why I was able to do a lease with no co-signor.
Thanks for the insight.
June 30, 2009 at 1:51 pm
Joanne:
There is also another reason why you maybe had “no credit history”. Some credit card companies do not report your credit limit to the bureaus, therefore, the bureaus use your highly balance posted as your limit. (Capitol One is one of these banks). If you pay it off every month religiously (or 95% of it) your limit according to your credit report is astonshingly low. Not good for a loan.
June 30, 2009 at 1:52 pm
correction: highest balance (not highly)
June 30, 2009 at 2:56 pm
I use a credit card for online/gas pump purchases or for large purchases (most credit cards provide additional protects if there is a problem). I know there are sometimes issue with the credit card/score when you don’t actually have a balance on your statement (payed it off before they billing cylce ended). While it will show up on the credit report the balance you were billed even if you pay it off in full every month. I don’t know about Canada but in the US some credit card issuers do not report your limit and as a result the credit score debt ratio uses your highest balance reported.
June 30, 2009 at 4:20 pm
I am with Gail, I think with discipline and education, credit cards are terrific tools! As long as they are just one of the tools in the financial toolbox and are used responsibly.
I think where some people get into trouble is when they fail to recognize that it’s actually their OWN money they are spending when they use plastic! Then the bill comes and they are still in denial — only looking at the minimum payment instead of the balance. (The CC companies must love people like that) When the balance accumulates, the plastic addicts aren’t just spending on the stuff, they are spending on the interest too, and I bet they don’t budget for that hungry expense either!
Fear of getting in over my head has always kept me from getting carried away with the cards. I am extrememly thankful to have them, for all sorts of reasons (past and present), but I am never casual with that little card —- anything that comes with that much fine print in the contract HAS to be taken seriously!!!
June 30, 2009 at 5:59 pm
While I love our Cdn Tire credit card–and especially all the stuff (kids’ bikes this year) we’ve gotten off reward money on the card–I now see that it was easy to lose track of what you are spending if you don’t track it. We always pay our card in full–though sometimes this was by putting it on the LOC (low rate) and then tightening our belts the next month to pay off both. We weren’t getting in real trouble doing this–but we weren’t exactly making progress towards our big life goals either! We’ve started tracking what we are spending, so far just by writing it down and continuing to use plastic. I’ve seen great progress this month, but if we start slipping, I will definitely give the cash jars a try.
In addition to out join CT card, we each have our own card dating back from university days. I think this is important as it establishes an independent credit history for both of us…and gives us a way to buy each other birthday/Xmas gifts, etc. without the other knowing!
June 30, 2009 at 10:13 pm
We solved the problem of not having the money to pay the Canadian Tire bill at the end of the month by using Gail’s jars and added a Mastercard jar. Money comes out of the appropriate jar and into the mastercard so without fail when the bill comes we have the money!
June 30, 2009 at 11:50 pm
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July 1, 2009 at 7:54 am
I agree! I use my aeroplan credit card for absolutely everything. We are planning to go to Italy in 2 years, and will likely at least have enough aeroplan miles for 2 tickets. This would not work in the long run, b/c there is a fee of $129.00 yearly on the card, but for a few years using this card we will save on the costs of our trip. And I can track all my spending so much easier than when I use cash.
July 1, 2009 at 8:49 am
MBNA Smart Cash Credit Card. No Annual Fee. Promo for 6 months of 5% cash back on groceries and gas puchases, 1% cash back on all other purchases (no limit). Regular benefits are 3% cash back on gas and groceries and 1% cash back on all other purchases (no limit). I think it’s the best cash back card out there right now. It’s not posted on MBNA’s website yet, but you can call them to ask for it. Code: CGLE
July 1, 2009 at 9:57 am
I found that there are really only three keys to using credit cards effectively:
1. Read your credit card agreement thoroughly.
2. Avoid at all costs any situation where you have to pay double-digit interest rates, especially in an age when you can get an unsecured LOC for under 5%.
3. Never have a credit card balance that you can’t either pay off entirely or move to a low-interest LOC at any time.
You can even use credit cards for short-term loans. Most of them offer balance transfers at very low short-term interest rates. Just make sure that you make the monthly minimums and — this is the key — don’t use the card for anything else. Usually, the way it works is that you may have 2% for balance transfers but it’s 20% for everything else, and any payments count toward the low-interest balance transfer first. So if you take out a $5,000 balance transfer, buy $5,000 worth of stuff on the same card then make a $5,000 payment, you will be paying 20% on the entire balance, not the advertised 2%. If you also need a card as a cash substitute, get a separate “convenience” card that you pay off in full every month.
I have also found that some credit card companies will resort to dirty tricks like claiming your cheque was “late” or “lost in the mail”, just as an excuse to level exorbitant interest rates and/or penalties. If that happens to you, just pay off the balance and cancel the card. Use Internet banking to make payments if at all possible.
July 1, 2009 at 11:28 am
@ Kit Kat: just signed up for it last week!
The only thing is, they don’t offer a download of ‘interim’ transactions, making it a bit harder to keep track of until you can get your full statement download at the end of the month. This is a bit inconvenient as I like to download the transactions days after making them so that I know where I am.
July 1, 2009 at 11:56 am
A friend of mine had a credit card with a high limit as it was the card they used for their business. He paid a huge amount in advance giving him a credit and then went and bought a car using the credit card, walked into the bank and paid the balance of the card off in full. The most bonus points I have ever seen anyone get in one time! He had the money saved for the car already – he just wanted the points! That is the way to work the system!
July 1, 2009 at 12:44 pm
@Nickiford
That’s a great idea to have a credit card jar!!!!
July 1, 2009 at 1:11 pm
The other piece of advice I would have is not to fall in love with the rewards or cash-back plans. I have yet to see a plan that offers more than 1-2% back in rewards, and they typically have higher interest rates and/or annual fees.
Rewards plans are insidious in a way, because they encourage you to spend money. If you’re really disciplined when it comes to shopping and money management, they’re fine. But most people are not, and that’s why the credit card companies offer them.
July 2, 2009 at 9:18 pm
[...] almost chocked on my morning coffee when I read the title of Gail’s post: The Upside of Credit Cards. Gail hasn’t gone over to the dark side — she explains that credit cards are simply a [...]
July 3, 2009 at 10:45 am
I ‘borrowed’ the Credit card jar from someone who posted on here. Might have even been Nikki. It sure helps you to both use your CC successfully AND maintain the jar system.
When I bought my new vehicle last month, I wanted to use my MC to pay the downpayment (I had the money already in my chequing account) but the dealer would not take that. I was so disappointed not to get the points.
July 3, 2009 at 11:37 am
I highly recommend the documentary film Maxed Out by James Scurlock, a Wharton Business School Graduate. The film highlights how cc companies utilize predatory lending practices and their target lending groups: college students (who are unemployed but are attending the ‘right’ schools), and people who have already declared bankruptcy once (in the U.S you can’t file for Chapter 13 again?). A Harvard professor asked cc executives to consider restricting credit access to low-income, high-risk customers in order to reduce the staggering amount of individuals forced to filling for bankruptcy, and her suggestion was met with this criticism: ‘But that (high-risk group) is where the majority of our profits are made’.
Our socio economic state in Canada is not healthy (why are ministers of finance and industry do not enforce our usury laws are beyond me), but in the U.S. and the UK the debt load is pushing people over the ledge.
July 7, 2009 at 4:19 pm
I am very thankful for my cc.
I use it to cover the costs of my medication and medical supplies, because they are *very* costly to pay up front for. I have benefit coverage, and for some items the gov’t pays me for, so once my claims have been submitted, and the gov’t cheque shows up, it all goes right onto my cc right away. My coverage is only 90%, but I tend to pay back to my cc about 110% just to keep up with the previous balance. (along with monthly paments which I pay more than the min.)
July 11, 2009 at 9:57 pm
Joanne: if you pay your c/c balance in full BEFORE your credit card CLOSING DATE, no payment obligation is required. When you get your c/c statement, no payment is required (minimum payment =0 because your paid your balance before the statement closing date) therefore NO PAYMENT ACTIVITY REPORTS TO THE CREDIT BUREAU FOR YOU. Make sure you have a PAYMENT DUE when the statement comes in, then pay the balance in full by the due date, and your payment history will report to your credit file. Cycle of activity on a c/c is usually 30 days, ie all charges minus – payments/credits = payment due by particular date. ie activity from June 12 to closing date of July 11, payment due July 31). If you pay in full before July 11, no payment due therefore no activity reported to bureau. Make payment between July 11 and July 31, reports to bureau, no interest charged.
July 20, 2009 at 8:12 pm
If you are going to use a credit card for a low rate balance transfer, be sure the card is paid off in full before you do the transfer because once that low rate transfer is posted, then any payment’s uou make to the account is applied to that transfer amount, leaving any purchase’s, on your account, accumulating interest, at your regular interest rate, until the low rate balance transfer is paid off in full. Do not use your credit card while you have a low rate balance transfer on it!!!!
August 26, 2009 at 5:27 pm
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