Street Cred...it
Credit; your likelihood to pay back a loan.
Credit Score; your Reputation as depicted by a Number.
It seems, in this world where so many things are depicted as black and white, that there are those who hate Credit Cards and preach abstinence and those that hate Credit Cards and have credit card debt.
Can there be responsible use of Credit Cards? Can you love Credit Cards? Is there a third option? Yes.
However, before we get into what a credit card is and how to use it, let's first discuss what a credit card is not.
1. It is NOT to be used as a loan. You should never buy something without the money and then hope to be able to pay for it over time. (similar to a car loan: get the car now and pay for it over time. That's a LOAN, this is a credit card.)
2. It is NOT to be used as an ATM machine. You should never use the Cash Advance feature. (similar to a payday loan. Credit cards allow you to get cash off of the card. The interest rates are typically 10% higher than the usual rate.) You should never use a Payday lending service and you should never use your credit card as one either.
3. It is NOT to be used until you have mastered the concept of Savings and Pay Yourself First! I cannot stress this enough. You shouldn't apply for a credit card until you first have established the habit of PYF.
Once you understand the above, let's talk about the responsible use of Credit Cards.
There are two reasons to use the credit card:
1. Extended Warranties & Fraud Protection
2. Cash Back Rewards
Extended Warranties:
Most credit cards will double the manufacture's warranty on select items (typically electronics). This means that, if you purchase an item using your credit card, you do not need to purchase the extended warranty. This increases your protection while saving you money.
Fraud Protection:
Unlike Debit cards which require 48 hours notification and a $50 fee for fraudulent purchases (and a 14 day waiting period for the funds to be placed back in your checking account), Credit Cards give you 60 days and will waive the $50 fee, if it was in-fact a fraudulent purchase.
Now, the above alone are great reasons for the responsible use of a Credit Card but the Cash Back Rewards programs are the things that make life worth living.
Early in the Summer of 2016 the Costco corporation severed its long-standing relationship with American Express and began a new merchant relationship with Citi/Visa. One of the hallmarks of this new relationship was the overhaul of the rewards program. The Costco Visa card has a 3%, 2%, 1% tiered rewards system.
For all fuel purchased on the card you receive a 3% cashback reward. For all restaurant and Costco food purchases made on the card you receive 2% and you get 1% on everything else that you purchase using the card.
Cash Back Rewards:
The idea is simple: You have already budgeted for several expense's (you are using a budget right?) The budget has an entry for fuel. Let's say you budget $100 for gasoline. If you make your fuel purchases with a rewards card (using the Costco example) you would receive $3 cash back for every $100 in fuel you purchase. You have extended your fuel budget by 3%!!
Do the same thing with your grocery budget and you could increase your food budget by 2% each month.
Now, the payoff. You're thinking to yourself; right, sounds too good to be true, you forgot about the interest you're going to pay by putting those purchases on a credit card. No I haven't. You see, this is all made possible by the Grace Period.
Grace Period:
This is a period of time (ranging from 21-26 days depending on the credit card) from the time of purchase when no interest is applied to your balance.
Since you are using budgeted money (NOT a loan to yourself) you simply make the purchase using the credit card instead of your debit card. Go home (find the internet) and electronically pay off the card from your checking account. You have earned the cash back reward without generating a balance; and more to the point, without paying any interest!
Remember, you must first have the habit of saving money and living on a budget. Then, using budgeted money, make rewards-qualified-purchases using the card. Next, pay off the card before the end of the grace period to avoid paying interest. Finally, enjoy a lifestyle that is greater than your income without living beyond your means.
You truly can have your cake and eat it too:
Last spring some neighbors, my wife and myself went on an Eastern Caribbean Cruise. It was an expensive trip. While we were wise about the money we spent to go on the trip, it took us several months to save up the money. We had a great time and near the end of the cruise we were already making plans for our next trip. We decided that it would be to Hawaii... in THREE YEARS! I was taken back by the long delay. Then my friend explained why.
The airfare to Fort Lauderdale, for him and his wife, was free. That's right, F-R-E-E! How? He had been using a Travel Rewards credit card. For every hundred dollars he spent, using the card, he got air miles that could be applied towards flights. Over the course of normal spending (budgeted money) for the last three years, he had accumulated enough air miles to pay for two round-trip tickets to Fort Lauderdale and consequently, in three more years he would have enough to cover the flights to Hawaii.
Now, be mindful of annual fees that deplete the value of the rewards program. Many cards that have great sounding rewards programs also come with high annual fees. An annual fee is a once-a-year payment that you must make simply for the privilege of using a particular credit card.
Do some simple math and make sure that, for your situation, you will earn more from the rewards program than the cost of the annual fee.
Store Credit Cards:
Lastly, there is a type of credit card offered by larger retail stores called, appropriately enough, a Store Credit Card. One of our local news channels did a black-Friday credit card story that has some additional information about Store Credit Cards v/s regular Credit Cards.
Good luck and enjoy building up your street cred...it
Questions:
1. In your own words, teach me what a credit card is NOT? (do not copy and paste me - plagiarize). Internalize the information and express it in your own unique way.
2. While watching the video about Store Credit Cards, what strategy could you use to help you establish credit and get your first credit card?
3. If you haven't already done so, download or create a budget and enter in your tracked expenses. Calculate how much extra money you could have if you were to use a card like the Costco Visa with its reward program as outlined in this post (what budget items would qualify and how much would you save)?
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