Thanks to credit cards, we can buy things without getting too concerned with how much cash you have on hand. But as much as they make paying for stuff more convenient, they can also turn into disasters for some people.
A lot of finance blogs recommend that if you don’t have enough cash, you shouldn’t be making purchases at all. I wouldn’t as far as to lump all credit card spending together as something negative. Personally, I’ve been using non-cash credit card receipts for my taxes, which has proved essential to running my business.
However, if you are one of those people who wields their credit card like a double-edged sword, the points below (and pointers) below are about you.
- Using credit cards as extensions of your income. It’s really easy to fall into this trap. If you’ve got your sights set on that brand new barbecue grill and aren’t willing to wait, you’re likely to pay for things without considering that wanting something is not the same as needing it. Our appetites for instant gratification push so many of us to live beyond our means.
The solution: Keep a savings/established emergency fund account that you don’t draw from on a daily basis. If you don’t have anything in the way of this yet, give Stash a try. It’s a free app that will automatically transfer small amounts from your checking account to your investment account. The best part? You don’t need to know anything about investment going in.
- Impulse buying. Same principles as above. If you had to pay cash for an item, you might think twice about it, perhaps even decide against the purchase at all. A study at the Journal of Consumer Research found that people generally spend less when using cash instead of credit. Still another study at MIT revealed that consumers are willing to pay twice as much for things when paying with a credit card. This fuels a lot of regrettable impulse buys that ultimately won’t improve your life, only detract from it.
The solution: Leave you credit card in your pocket, or maybe even at home. Simple, right? If you do end up paying by card, you’ll have to pay with a debit card, which means in the worst case scenario you only use the money that you do have. More likely than not it will give you pause as to whether you should be blowing your budget on that shiny new barbecue grill.
- Cash withdrawals. Taking a rare cash advance at an ATM might come in handy, but it’s a bad habit to start. Usually interest rates are a lot higher for cash advances compared to card purchases. Plus, some cards charge additional fees for cash advances.
The solution: Avoid taking cash advances at all if possible. Again, not extending yourself beyond your means is extremely important when it comes to maintaining your credit score, but also saving up.
- Convenience checks. See, I always thought these should be renamed “rip-off checks.” These are the strips of checks your card issuer sends to you through the mail. Fill in your name, the amount, and boom! Instant cash. Sounds great, except that they do the same harm to your finances as cash withdrawals. Never use these things unless it’s an absolute
The solution: Same advice as cash advances. Honestly, I’d recommend not keeping these around the house, since they’re just another temptation to spend money you don’t have on things you don’t need.
- Paying for everyday expenses. The more you use your credit card on day-to-day things, the more the added interest charges build up. This is especially true if you don’t pay off your balance each month. Although spending more on your credit card can be a nice way to earn rewards with some cards, earning a 3% reward only to spend 26% in interest makes no sense whatsoever.
The solution: Never buy something to earn the cash reward if you’re not planning to pay off the balance in full.
- Paying debt. Paying off debt with your credit card, which has far higher interest rates than most other kinds of debt, basically amounts to financial suicide.
The solution: Do NOT pay sizeable debts with a credit card under any circumstances. This means house payments, car loans, and other common loans, all of which have much lower interest rates. Letting those debts sit a little longer will hurt you much less than trying to repay them by creating credit card debt for yourself.
- Justifying buying at sales. If you’re holiday shopping, taking advantage of a legitimate sale can be a great way to save money. But never let a sale add to your credit card debt! This is called upside down finance, and you’ll end up saving less than you spend.
The solution: Don’t chase small savings if it means you have to give up more than you save.
- Having credit cards with annual fees. Sure, there are a handful of travel cards with annual fees that offer great rewards programs. But according to the American Institute of CPAs, only 7% of Americans actually use their rewards, and they usually end up paying for just a portion of the whole trip. If you’re going to “pay” for rewards with an annual fee, make sure that the rewards outweigh the fee before taking the plunge.
The solution: Sign up for cards without annual fees. One great example is the Chase Freedom Card below. Aside from the aforementioned lack of fees, it also offers 1 ½ % cash back on purchases, and has great sign-up bonuses. Plus, the spending requirement is a low $500.
Check it out here.
If you do have your credit card debt under control and don’t have an outstanding balance, here is an easy $450 for us (and you) to sign up! Its back the Chase Freedom Card! $150 for me, then referred Ellen (chase pays $100 for referrals with this card) AND $150 for Ellen. + I added Ellen as an authorized user for ANOTHER $25, and she added me for $25. Took 15 minutes total for a FREE $450!!!!!!!!!