So credit cards... They're like your frienemy: they are great to you if you treat them right but if you don't play nice for one moment, they can back stab you and cause you harm.
Now I personally LOVE credit cards. I think the reason why others tend to shy away from them is because we were never taught in school or anywhere else on HOW to use them PROPERLY. They say all debt is bad, but really, they're not. Debt is bad when you don't know how to effectively and properly use it. Let me share with you what I've learned.
Credit cards provide you with convenience, fraud protection, rewards, help build your credit score, save you in financial emergencies and more. But the ugly side comes out when you hold a balance on your card for too long. In other words, you've spent more than you can afford...
I had a friend reach out to me a while back in need of some financial advice. She was a couple thousand dollars in debt on her credit card and had no idea how to get rid of it. She kept paying as much as she could but the balance seemed to get larger and larger each statement. We sat down together, went through it together and found a few things out.
First off, she was dining out a little too often. Don't get me wrong: when I go out to a restaurant, I treat myself nicely. But we're talking about 3 meals per day purchased! And as a student studying and working full time, those expenses will cost you. So we decided to make a goal to start spending more money on groceries and packing a lunch to work/school. She even suggested she take it further by cooking herself a nice, fresh dinner at home instead of grabbing a bite outside. She ended up saving hundreds that month just by changing up her food spending!
Next thing we found out were the cash advances she was taking out on the credit card. Did you know the moment you take a cash advance on your credit card, they start to charge you interest on it? Do you remember what that interest rate was when you signed up? On average: 22.99%. Think about it: to borrow $100, you'll need to pay back $122.99 after one year. That's insane! Not only do they charge you a high rate, but they also charge you a fee to get that cash advance! Remember, those little charges do add up!
Lastly, I found out she wasn't paying the minimum payment on time either. After some guidance on this matter, I explained to her that for credit cards, the minimum balance must be paid. If not, it will hurt your credit score. With all credit cards, there is usually a grace period of 21 days. If you get a statement from June 5th to July 4th, your purchases would be free of interest till July 25th. That day, your minimum payment is also due.
My advice to her was this:
Credit cards are a wonderful tool to use in your personal finances. The key is you need to understand the fundamentals of how they work or else they will cut you and it will hurt. Credit cards give you a chance to pay for a meal or a big ticket item even when you don't have the funds in your chequing account. They provide you with cash back, travel rewards and many more benefits for a yearly fee. Think about it this way: someone is paying YOU to spend on your everyday needs! In my case, I feel like it COSTS me when I don't use a credit card! I enjoy getting my cash back on my gas, groceries and meals. And you know, there are free credit cards out there with cash back or travel rewards too, right?
My best advice is this: know how much you make each month on average less your rent payment and use a percentage between 20-50% of those earnings to know how much to charge on your credit card (varies based on income and needs). If I make $3,000 per month ($3,750 before taxes), I'll have $2,000 left after paying rent. Usually I allocate only 30% to spend on my credit card, so that's $600 and that's plenty for me. A minimum of 20% of that goes to my investment account (pay your future self first) and the rest goes towards my car payment, insurance, utilities and Netflix. ;P
We're young: we don't need any more debt to hold us back from achieving financial freedom. If you play within the rules of credit cards responsibly, you'll never have to pay any extra fees, interest or penalties ever again. And you'll get paid to spend with cash back, travel rewards and more. The key is to use it responsibly and only spend what you can afford.
For a more personal assessment of your financial spending, contact me and I'd be happy to help. Better yet, there are great accounts and cards that are FREE to open and maintain which I could refer you to. Let me know!
Till next time,