I often listen to Dave Ramsey as I am driving to and from the rental properties that I manage. Ramsey is adamant about cutting up your credit cards. There are many other financial guru’s that give the same advice.
Speaking from personal experience, I have to respectfully disagree. I have successfully used credit cards for the past 10 years. There are plenty of credit card benefits. Using credit cards has significantly helped my credit score which has saved me tens of thousands of dollars, and will end up saving me millions of dollars in interest over my lifetime. On top of that I have earned thousands of dollars (real cold hard cash) through cash back rewards. My personal experience follows below.
My First Credit Card: Discover Card 2006
In 2006 at the age of 21, I applied for and received my first credit card from Discover Financial. After being rejected by Mastercard and Visa for having no credit history (catch-22 anyone?), I was estatic to have Discover’s approval. The credit card came with a $500 balance. What really attracted me to the card was the fact that I could receive 1% cash back on all purchases, as well as up to 5% cash back on select items during certain months such as gas, groceries, home improvement, etc. The cash back reward acted as cold hard cash which could be directly applied to my credit card balance. What was really juicy about the card was that cash back rewards could also be converted to a gift card, usually at a 10% discount. So for instance, I could purchase (and still can) a $100 gift card using only $90 of my cash back bonus.
As a college kid, I needed to save every dime I could. I also wanted to build credit for my future. Having access to additional funds in case of an emergency also made me feel more secure. I made a commitment to only use my credit card for gas and emergencies. Using the card for gas meant that I received cash back rewards, which I wouldn’t have received otherwise.
Since 2006, I have maintained my discover card, faithfully paying off the balance in full every month (this is key). Overtime, I gradually asked for increases in my credit limit. I also applied for and have since acquired a Mastercard and Visa once my credit was built up. All of these cards have gradually increased in credit limit sizes. As these credit sizes increased, so did my credit to debt ratio. A high credit to debt ratio increases your credit score even more!
LESSONS ON PROPER CREDIT CARD USE: ACCESSING CREDIT CARD BENEFITS
To Dave Ramsey’s credit (no pun intended), there is an epidemic of credit card debt in America. This isn’t the fault of the credit cards however, but the people who use them. Credit cards are a tool, just like a gun. It needs to be treated with respect and will proper rules for handling.
From Dave Ramsey’s page entitled, “The Truth About Credit Card Debt,” he states the following:
“Myth: Aren’t there positive uses of a credit card? Like rebates and airline miles?
Truth: Responsible use of a credit card does not exist. Credit card debt is a major problem in America.”
While I agree that credit card debt is a major problem in America, I don’t agree that there are no positives to using a credit card, and that responsible use doesn’t exist. The benefits of credit cards do exist, and I am proof of it. But you must follow these important lessons.
Lesson #1: Use your credit card on necessities ONLY
As stated earlier in the post, I only use my credit card for necessities only. This includes food, water, electricity, and fuel for travel. This shouldn’t include entertainment and impulse purchases. In other words, this should only be used for monthly expenses in your budget, that you would have had to pay for anyway.
Lesson #2: Pay your credit card balance off IN FULL EVERY MONTH!
The key to building and keeping credit, in addition to staying out of credit card debt is to pay your credit card balance off in full every month. No exceptions. One of the great benefits of credit cards is that they give you an interest free loan for up to 30 days after purchase! This is an incredible fact of the benefits of credit cards that most people don’t think about. You are billed once a month for all purchases during the month a 0% interest. The key is to honor this 0% interest by paying it off on time, and in full every month. This keeps your credit to debt ratio low as well which increases your credit score!
This lesson is where most people will fail and why Ramsey is in business. If you can not commit to paying off your balance in full, forget it! Cut up your cards and stop reading.
Lesson #3: Leverage the benefits of credit cards to achieve greater access to credit
After the first 6 months of paying on time and in full. Request an increase in the credit limit of your card. After receiving your first increase, apply for another credit card. After proper use of 2 to 3 credit cards over 2 years, your credit score should be approaching (if not over) 700. At this point you will get the best rates on personal loans and mortgages. The interest saved from lower rates will save you thousands!
Lesson #4: Shop for the best credit card deals when applying for new cards
I personally enjoy the webpage the credit card guide from mymoneyblog.com. This credit card guide offers a compilation of the latest and greatest offers from credit card companies. Looking at it right now, I can find credit cards that offer up to $500 bonuses for signing up, 0% interest through 2015, and awesome cash back bonuses. I have personally used this site to get info and sign up for a credit card.
BUILDING FINANCIAL RELATIONSHIPS: FURTHER BENEFITS OF CREDIT CARDS
Discover Financial has been good to me. A few times they have sent me a letter in the mail with $10 in it just for being a long time member. That goes a long way in terms of customer loyalty. In addition, Discover Financial has branched off into Home Mortgage, Personal Loans, and Banking.
Last year they sent me a personal invitation to access a personal loan. I will post the details in another post. I accepted the invitation and used this loan to kick start my mobile home investments. All of this wouldn’t have happened if I didn’t start using my credit card and built a strong relationship with Discover!
If you are interested in getting a discover card and $50 immediately credited to your account, please comment and leave your email. I will send a link to you that will start the process.
Benefits of Credit Cards BONUS: BALANCE TRANSFERS
I have used the balance transfer feature twice. Balance transfers are a great tool to solve cash flow problems, or to get a personal loan when no other options present themselves. I have used balance transfers to specifically invest or rehab rental property.
In short, you can access the credit limit of your credit card directly and have this money deposited directly into your bank account. The credit cards all compete, that’s why I believe it is important to have three different cards. You will get offers from different cards at different times of the year. Usually they will offer you a 0% interest rate for a year all the way up to a year and a half. Most of the time they will charge you 3 to 5% upfront on the balance, but sometimes you will find a special offer that has NO upfront fee.
Here is the kicker. You must pay the minimum balance every month on time to ensure the 0% interest rate. If you don’t, then the credit card’s normal interest rate will begin to apply. So for instance, if you balance transfer $10,000, then you will need to pay $50-$100 (or whatever the minimum is) for the duration of the “interest-free” loan.
I personally used a $10,000 balance transfer to buy a mobile home and rent it out for a monthly cashflow of $400 (but that’s another story for another post :^)..).
CONCLUSION: Credit card benefits are many, BUT..!
As we have learned, there are many credit card benefits. I will continue to use them for the foreseeable future. I currently have Business credit cards, which I am using in the same way to build credit for my business entities. In a similar way described above, these business entities will have great access to finance and business loans in the future because of my proper use.
Proper use of credit cards is key. If you don’t use them properly, as with the case of matches, guns, explosives, hammer, or any other tool…then you will get burned, shot, exploded, or have a broken bone!
Use your credit card wisely and the benefits will be great!
Do you agree? Do you have a story about your experience with credit cards? Please feel free to comment and share!