81% of Americans own a credit card and the average cardholder keeps at least three cards in their wallet. With stats like this, it’s easy to see how the average household is $6900 in debt, and why cards are so heavily utilized.
Depending upon your own spending habits, cards can either be a great financial tool, or a sneaky enabler for financial irresponsibility. I’ve had my own checkered past with credit cards (see here, here, and here) , but the older I get, the more I realize they're not the enemy everyone makes them out to be.
The exact moment I realized credit cards weren't scary and were actually pretty cool happened in 2016.
For the longest time, I avoided credit cards. I’d had problems with them in college and I wanted to live life without them. Then, I got a business card and received 60,000 points as a signup bonus and was able to travel to Italy with them for FREE.
Suddenly, I was very interested in what credit cards could do. I never really got the hang of travel hacking, but my husband and I still use cards today to monitor what we spend as a family unit and keep tabs on our budget.
Here are some ways credit cards can actually be a great tool.
- 0% balance transfer offers to pay off debt faster
- Reward points and cashback to save up for travel
- Making it easier to monitor spending between family members
- Large purchases in a pinch
But here is why people think they're bad.
Anytime you do not pay the balance on your card in full, card companies will charge interest, which is ultimately what they want. This is how they make money! (Here is an easy-to-understand explainer of how a credit card balance works.)
Did you think those sexy airline rewards come free?
Here’s an example of how quickly this thing can spiral.
Cards have an Annual Percentage Rate, but they also have a daily rate (your APR divided by 365 days in a year). So, say Sally Ann spends $2000 on Coachella Tickets on her 20% APR card and only pays the minimum $100 payment in February.
March 1, her balance is $1900 and this amount is multiplied by the daily interest rate (.0005) and the card company adds a $1.04 daily interest charge. Then on March 2nd, her balance is 1901.04 and then this amount is multiplied by the daily rate (.0005) and so on and so on so the balance grows and grows.
Using daily interest calculations, you can see how quickly one time purchases made on credit become so much more expensive and troublesome.
How to make sure credit cards stay your BFF
Situations like the one with Sally Ann and the Coachella tickets can be easily avoided with the same old advice you hear everywhere – use the cards, get the points or cashback, and then pay the balance off in full, every single month.
If you’re really interested in credit hacking, you’ll need to become very organized and pay strict attention to what you need to do to get the bonuses and optimize your card spend.
I’ve never been able to master it, but it can be done. Here’s one of my favorite posts on how to get started travel hacking if you’re interested.
And yes, sometimes in order to save more money, you’ll need to live on less. While this isn’t fun, even $1,000 in savings , or a life-changing $500, can go a long way to ensuring the overages of your life stay off the credit card, and out of the card company’s pocket.
This post is sponsored by Lexington Law. All opinions are my own.