Your credit is something that is important throughout your entire adult life. I am going to lay everything out for you today about credit cards and building your credit score. It's time we break down credit cards and explain the good, bad, and ugly.
For years, Dave Ramsey has been on TV and radio shouting a matra that "all credit cards are bad." He makes a point of promoting people cutting up their credit cards. He has written several best selling books. He teaches you that cutting up your credit cards is the only way to free yourself from debt payments each month. People should learn to "live within their means" and credit cards should never be used for anything. NEVER!
On the surface, these ideas seem to be really smart. I mean, what isn't there to like about being debt free and cutting up your credit cards? It seems like really practical advice...
Unfortunately, this conventional "wisdom" turns out to be quite hurtful to some people who listened to this advice in their life. The reality is that credit cards are not the cause of financial problems. People spending money that they don't have to spend is the real problem. Credit cards used properly are actually the building blocks to building a high credit score and unlocking your financial future.
According to biggerpockets.com, "Let’s be clear. Dave Ramsey is awesome at getting you out of financial trouble. Just be careful when he tells you to pay cash for real estate or sell your rental in order to complete his 7-step program."
Let me ask you a question. How easy do you think it is it to qualify for a home mortage when you've never used a credit card? According to NerdWallet, it is actually quite difficult to find a lender to work with if you do not have an established credit score or payment history. The reason why? Responsible credit card use shows any potential lenders that you are able to manage your finances properly.
So what's even better than having a high credit score and financial opportunities that others will not receive in their life? An intelligent credit card user actually turns the credit card game on its head and uses his or her credit cards to make money for themselves.
Using Your Credit Cards to Earn Money For You
In order to get the most out of your credit cards, not only do you need to use them, but you need to use them frequently. For example, if you have two small cards with a $500 limit on each, then you want to nearly max them out with use each month. Set up one card to pay for all your recurring monthly bills, and then use the other card for gas and grocery purchases all month.
If you already have credit cards with much higher limits, say $5,000 - $10,000, then obviously do not max them out. Instead, you should use your credit cards to the fullest extent possible. Here's the catch: You have to pay them off, in full, every month without fail.
I want to be real clear on this part. I do not condone having credit card debt or auto loans in your life. I am teaching you all the ways to "hack" the system, not get into debt.
Let's say you have a $90 cable bill due on the 3rd, a $110 cell phone bill on the 12th, and $150 in auto insurance premiums due on the 15th of each month. You also buy gas using your credit card on the 4th, 11th, 18th, and 26th, spending a total of $165. That's a total of $515 that you have put on your card. But here's the beautiful part - your credit card company sends the statement on the 1st of each month, but doesn't require payment until the 15th. This means that the charges of $515, some of which date back to the third day of the previous month, aren't due until the 15th of the next month. Since interest is only charged on the unpaid portion of your monthly balance, this represents a six week interest free loan! If you have a $1,000 credit limit (or two $500 credit cards), you can continue charging on the card into the second month before ever paying for the first month's charges.
When you combine the long repayment time with credit card perks, such as miles or cash back, you can really use your credit cards to make some real money each year. The smartest consumers know all about this technique and use it all the time. Many take vacations each year on their "miles" earned by using a credit card year round.
Use Balance Transfers To Your Advantage
If you have a high credit card limits, your credit cards can be used for the short-term financing of larger purchases. Let's say you had a $10,000 credit limit and you wanted to buy a new sofa for $2,500. The financing options at furniture stores are normally pretty bad, so why not just finance the purchase yourself? You could easily have an interest-free loan for up to 45 days, during which time you could save the money to pay off the entire amount, or at least a huge portion of it. The best thing about your mailbox being constantly flooded with credit card offers is that frequently you can transfer existing credit card balances to new cards with introductory interest rates of 0 percent! Buying the couch, transferring the balance, and paying 0% interest for 12-18 months sounds like a pretty good deal compared to more "traditional financing" offers.
For example, imagine you decided to purchase a used car for $9,000 by using your credit card. Conventional wisdom would say that this is a terrible thing to do, but you now know better. You have already been offered and approved for a new credit card with a $10,000 credit limit, and an introductory interest rate of 0% for 12 months. After making just one payment on your current card's balance, you transfer the remaining $8,500 to your new card, where you can now pay it off in full with 12 payments of $708 - all of your payments are principal, with no interest. After just 13 payments, you'll own the car, free and clear. Is this any riskier than buying a car and financing it for 48 months or longer? No.
If the $708 payment is too much for you each month, you could choose to pay less each month. A riskier, but potentially more rewarding strategy would be to pay as little as possible on the new card, and then hope that another 0% percent balance transfer offer comes your way in the next year. There's absolutely nothing illegal or even unscrupulous about playing the credit card game this way; it actually makes more financial sense than signing up for a longer period of debt payments.
Remember, credit card companies exist to make money from your financial mistakes, but if you're a smart consumer, you can change the game and actually make money for yourself each month! What's even better, even if it is a bit strange, is that the credit card companies will find you more desirable because you open up a lot of accounts and use your credit cards all the time. So the next time you read an article in which some "financial guru" tells you to cut up your credit cards, do yourself a favor and cut their financial advice from your news feed.