It has officially been 14 months since we took out our first credit card in seven years (see the journey from the start: My credit card experiment). I must admit I am completely surprised by the outcome. I thought for sure that I would be canceling the card and heading back to my debt card within the first year. But guess what? I ended up liking the advantages of having a card and more importantly it did not cause us to spend more money! In fact our expenses compared to the previous year were less.
This got me to thinking about exactly when is it beneficial and good for your finances to have a credit card. I firmly believe that these items below are critical for credit cards being a positive in your life.
Pay off the Balance Every Month
You must pay off the balance every month. Racking up interest charges only eats away any money you could have been using to save for retirement or have life experiences. Carrying a balance on a credit card is a bad idea; if you don’t have the cash to pay off all balances today, then don’t get a credit card.
This is especially true when you are trying to get out of debt. It is hard to determine where you in your debt repayment plans if your balances are constantly changing. Make sure you get all debt paid off (expect the mortgage) before you head back to credit cards, it is just too easy to let those balances pile up if you never have to go back to zero at the end of the month.
Spend Less Than You Make
You need to make sure you are spending less than you make. This step is absolutely crucial for you to achieve any level of lasting wealth. If you are not vigilant about this by budgeting or living way below your means then don’t get a credit card. It will only create more confusion around how you are doing financially.
Here is the thing; if you are experienced in living on less than you make and you plan out what you are going to buy (AKA you have a household budget) then you buy stuff because it is in the budget, not because you have credit and want to use it.
Get Out of Debt First (Except the Mortgage)
When you are trying to get out of debt you want to see your outstanding balance go lower, not up and down because you are spending in-between your regular monthly payments. How can you know if you are on target if the target is constantly moving?
Stop using credit cards until the debt is gone, then you will know where you are and have the cash to pay off the credit card every month.
Build an Emergency Fund
Make sure you have a way to pay for emergencies other than using a credit card. This is how you run up debt in the first place, that and not following a budget. Get at least 3 months saved up so that no matter what you can pay off the balance at the end of the month to avoid interest charges. Ideally you would have even more than 3 months saved up, but three months can get you started. (YouTube video on Emergency Fund Basics)
Select the Right Card
Finally make sure you are using a card that suits your personality and needs. Once you have done all the steps above the credit card becomes a tool that can make managing your finances easier while adding perks to your life. If you hate to travel don’t get an airlines card. Instead get a cash back card, or chose one for your favorite sports team, whatever you get make sure it is good for you and your life. Don’t get a card just because someone else loves the cards, if you can’t find one you love don’t get a card! (More on How to Pick a Credit Card)
Getting a credit card ended up being beneficial to us, but only because we took off the seven years necessary to learn to live on less, to pay off debts and to build an emergency fund. Without these steps it is too easy to get into credit card trouble. Only get a card if you can manage it wisely and you are buying because it is in the budget not because you have a credit card!
Need to learn how to budget? Check out our household budget ebook with forms.