Managing Your Plastic

by | Aug 3, 2009 | Cash Flow, Fee Only Financial Planning

credit cardsWhat credit cards do you use, and how do you use them? In a recent article published at www.creditcards.com, Sara Aase asked that question of six financial professionals, including me.

Among the six of us, we use 12 different cards, only two of which were used by more than one member of the group. A couple of us carry only one card, most have two or three, and the most cards any one of us has is five.

In spite of the range of cards in our wallets, though, the interviews show several clear patterns.

First of all, no matter what cards we use, all of us choose those cards primarily for the perks they offer, from cash back to discounts on electronics or restaurant meals. For several of us, who travel a great deal, the rewards of airline miles and elite traveler status are extremely important.wallet with credit cards

In my case, I’ve been able to take my family on several vacations where at least one of our tickets was free. In addition, I carry everything on instead of checking bags when I travel on business. The seemingly minor privilege of being able to board first ensures me plenty of room in the overhead bins so I know my stuff will be easily accessible. It’s just one more thing that makes travel a little more comfortable.

Second, because the rewards are the reason we chose the cards we use, several of us run almost all our expenses through those cards. Groceries, clothes, miscellaneous purchases, dental checkups, you name it. If we can pay with a credit card, we do, because the more we buy on that card, the more perks we get.

Third, putting everything on plastic only works because we pay off our balances every month. This is an absolute essential part of using credit cards wisely. It’s one thing to buy your groceries with a Visa or MasterCard, and then write one check at the end of the month, because you’ll rack up airline miles or get a free camera. It’s something else again when you buy groceries with a credit card because you don’t have money in your checking account to pay for them.

This article emphasized a fundamental rule of credit cards that is all too easy to overlook. The only people who should use credit cards regularly are people who don’t need them. This might not seem fair, but it’s essential for future financial security.

Every time you use your plastic, you’re getting a loan—one that usually carries a very high interest rate. If you need that loan in order to buy whatever it is you’re buying, you probably shouldn’t be buying it. If you can’t pay back the loan in the next month, your purchase could end up costing you much more than its initial price.

What about emergencies? Unfortunately, sometimes plastic seems to be the only way to pay for an unexpected medical bill or car repair. If that’s the case, the goal should be to pay it off as quickly as possible. And remember, if you can manage to make a credit card payment, you can manage instead to save a little money every month so you’ll have cash for those emergencies.

credit card machineDespite the current credit crunch and economic turmoil, credit cards aren’t going to go away. They are a reality of modern life which can be not only a convenience, but an asset. This is only the case, however, if they are used carefully. Ideally, plastic should never be considered a source of money you don’t have, but a tool to manage money you do have.

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