How I Use Credit Cards … And Why

Sasha writes in with a typical question:

A lot of different personal finance bloggers have different ways that they use credit cards. Some of them don’t use them at all. Others seem to use them a lot. Where do you stand and why?

I started off answering this question for the reader mailbag, but then I realized the answer was going to be rather long and involved so I spun it off into its own post.

So, let’s break this down bit by bit.

How do you use credit cards? To put it simply, we use rewards cards for routine purchases in our life and pay off the full balance at the end of the month. If we can’t afford the purchase or haven’t budgeted for it, the credit card is not a crutch to help us purchase it.

What do you do in emergencies without the card as a crutch? We have a large emergency fund in place to deal with true emergencies — a car breaking down, a hot water heater failing, and so on. We’re able to have this emergency fund because we consistently spend far less than we earn.

Why not just use a debit card? Two reasons. First, a debit card doesn’t improve your credit score. A healthy credit score not only helps you out with things like car loans, it also reduces your insurance rates. Second, a debit card typically doesn’t provide you with any rewards for using it. Similarly, using a debit card means the money is directly pulled from your checking account, and since my wife and I have an interest checking account, we prefer to keep the cash in there so that it can earn interest before we pay the credit card bill at the end of each month.

What cards do you use? My wife and I, between us, have three active credit cards — a Citi Driver’s Edge Mastercard, an Amazon.com Visa, and a Target Visa. We use the Driver’s Edge card for gas and automotive purchases, the Amazon card for purchases on amazon.com, and the Target card for purchases from Target. This allows us to get roughly 3% back on all of our purchases on cards. These three cards take care of the vast majority of our purchasing on cards.

Don’t reward cards encourage you to spend more? No. These cards are tools, not excuses to spend more. They simply make the purchasing process more convenient (it’s easier to run a card than it is to fill out a check at the checkout) and occasionally earn us a nice reward — a 10% off card for Target, a $25 reward certificate for Amazon, or, occasionally, a check from Citi.

What’s the disadvantage of doing things this way? First of all, you have to be disciplined. If you’re tempted to buy unnecessary things simply because you have the credit to do it, this strategy won’t work. You also need to have the routine of paying your credit card bills down cold — even one late payment can wipe out the benefits of doing things this way.

To put it simply, I do not believe credit is inherently bad as some people do. I believe the big risk associated with this strategy is personal — it’s up to your organization skills and personal willpower to make it a success. I’ll be the first to admit that there was a time when I didn’t have either of those attributes – and it resulted in $17,000 in credit card debt. I had to learn how to use a card.

If you have those attributes, using a reward credit card for your routine purchases provides nothing but benefits – better credit rating, rewards, and convenience at the purchase site. For us, these benefits have been a great help over the past few years.