Nowadays having a credit card is normal, and everybody uses it for so many reasons. However, so many people don’t use it responsibly, leading to debt and bad credit score.
Few days ago, wandering online, I read this quote in an analysis of what some are calling the “hollow middle” of the American Dream:
Forty years ago, the term “middle class” referred to Americans who had successfully obtained a version of the American dream: a steady income from one or two earners, a home, and security for the future. It meant the ability to save and acquire assets. Now, it mostly means the ability to put your bills on autopay and service debt. The stability that once characterized the middle class, that made it such a coveted and aspirational echelon of American existence, has been hollowed out.
Vox.com
Sobering words. Unfortunately, many of us can probably relate. How often have you considered it a “win” if you can simply keep up with monthly expenses and avoid being completely overwhelmed by debt? It’s like we’re no longer trying to reach goals so much as just keep running. If we’re on our feet instead of face down on the track, that’s the best we can hope for!
I’m not sure it is, but that’s a conversation for another day. At the moment, I’d like to spotlight one particular aspect of this sort of month-to-month survival – “responsible” credit card use. I put it in quotes because the term itself is worth considering. Is it using a credit card responsibly if you’re not maxed out and still able to make your monthly payments? What about if you have a little room left and you pay more than the minimum each month, even though the full balance is never, ever, ever going to go away? Have I proven I can use a credit card responsibly if the issuing company keeps raising my credit limit?
We’re going to look at several versions of what might constitute “responsible credit card use.” Indeed, not every expert agrees on what this looks like. I’m not looking to argue with anyone in particular, but I should confess up front I’m not as dogmatic as some. In my experience, life is a little more complicated than we’d like it to be and we sometimes have to look at what’s practical as much as we do what’s ideal.
With that in mind, let’s talk about how to use a credit card responsibly by looking at several different definitions. What makes the most sense for you, of course, is for you to determine.
Several of the most respected financial personalities in the U.S. would argue that “responsible credit card use” is a paradox to begin with. You can’t use a credit card responsibly because it’s irresponsible to use credit cards, period! Clearly this resonates with a lot of people, since those saying it are selling millions of books and videos and online courses and coffee mugs and whatever else. Hey, more power to them.
Some, like Dave Ramsey, aren’t sure you need a card at all. Manage your budget, keep enough in savings, and dial back what you think you need, and you’ll be fine. Most reasons for having a credit card aren’t reasons at all, he insists – they’re just excuses.
And this advice doesn’t only apply to those in needs, it applies to everybody, and even those who think that using their cards collecting rewards, miles, … will help them make some money!
You don’t build wealth with credit card rewards and airline miles. You can’t beat the credit card companies at their own game.
Dave Ramsey
Others recommend keeping a card or two for emergencies. In this scenario, you don’t carry it in your wallet or purse. It stays locked up at home somewhere inconvenient and secure unless absolutely necessary.
This one is certainly doable, but there’s a tradeoff in terms of convenience. We live in a world which assumes, for better or worse, that adults have credit cards and expects us to use them. If you want to be able to book travel, shop online, order carry-out, or rent anything from a car to a DVD, chances are good you’re going to be asked for your credit card information.
Of course, many of these scenarios can be handled just as well with a debit card. But not all of them. And there are limits to what your debit card can do unless you have sufficient funds in your account to cover everything.
I don’t use a debit card. The safest thing is a credit card because you’re using the bank’s money. If someone accesses your information, they are stealing the bank’s money, not yours.
Frank Abagnale
It’s hard to argue with this one in theory. What could be more responsible than using credit cards for the security, flexibility, and rewards they offer while carefully budgeting so that you never pay a dime of interest, let alone penalties or late fees? It’s the best of both worlds! Shop online? No problem. Book hotel rooms or buy tickets? Done! Go cash-free at the mall, grocery store, or wherever else? Easy-peasy!
And imagine all the cash-back, discounted purchases, travel miles, or whatever else you can accumulate. Good times.
Depending on which research you use, somewhere between 33% – 40% actually pay their credit cards in full each month. That’s pretty impressive until you realize those same numbers means somewhere between 3/5 and 2/3 of us don’t. We’re using the cards, but we carry a balance each month. It doesn’t take long before we’re sliding into the typical American muck and mire of endless credit card debt. Depending on how much you actually pay towards your balance each month, it’s easy to end up paying interest on the same money over and over, and then pay interest on that interest, and so forth.
In short, if you’d like some cutting-edge free financial advice, paying off your balance each month is a great way to use a credit card responsibly – if you can actually do it consistently, every time, without fail. Otherwise, it’s a great way to convince yourself you’ve got everything covered while setting yourself up for major problems.
This one can look quite different from person to person. The basic idea is that you avoid using your credit card for impulses or conveniences, but use it for specific types of purchases or in certain situations. The key here is not so much which purchases or situations as it is being genuinely strategic.
There’s a scene in the 1994 movie “Reality Bites” in which Winona Ryder has been given a credit card by her father specifically for putting gas in her car. (If you’re old enough to remember cards specific to a particular gas station chain, this echoes those days.) Ryder spends the day at the pumps, charging gas for strangers and taking their cash instead – thus beating the system. It’s an amusing scene, but doesn’t quite qualify as the sort of strategic use I mean.
Let’s say, for example, that you have a teenager at home, or a kid almost ready to go off to college. You want them to learn how to use a credit card responsibly and you’re looking for the appropriate balance between trusting them with financial tools and setting them up for major crash-n-burn debt trouble. Maybe you’ve start them with a card designed for young adults to grow into, while they’re still at home and easily monitored. Then, when they head off to college, you add them to one of your cards with specific instructions.
They can use the credit card for textbooks, on-campus meals, and a set amount of personal entertainment each month. You still get the statements, so it’s easy to know whether or not they’re staying within the guidelines. This allows your young adult to have some of the freedom and conveniences of plastic while still working within clear limits. Ideally, this makes it easier for them to grow into responsible credit card use on their own once they’ve graduated.
Or, perhaps you have a few cards you keep locked in your desk or fire safe at home. You’re saving for a family vacation, but you know some of your trip will go on the cards as both a practical and a financial convenience. You set a budget in advance and figure you should have them paid back to nothing within six months of your trip. Then – and this part is important – you follow through and do it that way. Or you keep a card in reserve for unexpected repairs, medical expenses, or legal bills. You get the idea.
I’m not saying there aren’t other options. You don’t have to have credit cards to pay for textbooks or go on vacations. As a matter of reality, however, these are things people often use plastic to pay for. Rather than going full all-or-nothing and shaming one another for the practice, we can at least look for ways to be a bit more pragmatic. We don’t live in theory, after all – most of us are trying to navigate the real world as best we can.
If you decide that realistically you need some sort of card in your economic arsenal, the next step is to make sure it’s the right card for your situation and style. This is the 21st century – you can research and compare just about anything before you commit. Credit cards are certainly no exception.
If you simply don’t think you can control your impulses consistently enough to use a credit card responsibly, it might be better not to have a traditional card. A pre-paid credit card gives you much of the flexibility of the more typical version, but without the ability to go over what you can afford and into a potential spiral of debt.
In fact, there are a wide variety of credit cards and cards that look and work much like credit cards available these days. Not every one of them makes the same amount of sense for everybody, but chances are there are a few which fit your needs and your lifestyle.
If your only concern is having a card available for the occasional special need, your priority might be the lowest possible interest rate and no fees.
However, if you use your card regularly and pay it off every month, on the other hand, you should do your homework ahead of time and figure out which cards offer discounts or bonuses for using them on things you’re already buying or at places you’re already going.
Like restaurants or radio stations, credit cards can all have a great deal in common while still being nothing like one another in practice. It’s worth taking a few days to kick around your options before you apply for one.
You are looking for the right credit for you so it’s easier to use it responsibly? We got your back! We partnered with HiFiona to develop this widget which shall help you find the right credit card based on your needs and current situation!
As Robert Kiyosaki, the writer of Rich Dad, Poor Dad tends to say it, more often than not the reason you are not using your credit card responsibly is not because of the card.
Don’t cut up your credit cards, the problem is not the cards, it’s the lack of financial literacy of the person holding the cards.
Robert Kiyosaki
Having a card or two with an available balance actually improves your credit score. Now, let me be clear – I’m not a fan of trying to “game the system” or make weird choices simply to bump up your score a few points here and there. As a practical matter, however, a better credit score means you pay less for the money you use, whether you’re taking out a mortgage, financing a vehicle, or – yes – choosing a credit card.
Part of your credit score is based on how much credit you have available but aren’t using at the moment. Two cards which are maxed out don’t help you at all, and probably hurt your score a bit because they’re part of your total debt and your debt-to-income ratio. Two cards with a combined $10,000 debt limit, on the other hand, and a total balance of, say… $1,900 you’re paying off in a timely manner, mean you have over $8,000 in available credit you’re not using. That bumps up your credit score.
Credit card companies aren’t necessarily “evil,” but they are in business to make money. The longer you’re in debt, the more money they make over time. If you’ve ever had a credit card balance roll over from one month to the next as you pay the suggested minimum payment on your bill or online statement, you’ve probably noticed that you can make those minimum payments month after month and your balance never seems to go down – even if you’re not actually using the card all that much in the meantime.
Those minimum payments are calculated to ensure that most of what you pay on any given month goes towards the interest on your loan (note: all credit cards are high interest loans). The issuing company wants to charge you enough that they’re making a profit, but they’re not looking to make a small profit quickly so much as a huge profit over a period of years and years.
If you’re living paycheck to paycheck, it’s easy to make just those minimum payments so you can still afford to eat and keep the lights on. If that’s what you are doing, try another way. Minimum payments mean you’ll be paying on what you owe for years and years – literally – with minimal reduction in your actual balance.
Sometimes even the best people find themselves unable to keep up with life’s twists and turns. This 2020 year has certainly offered more than enough proof of that. If you’re finding yourself unable to get or keep your credit card debt under control, or any other combination of bills and balances, you’re not alone. If you’re worried, that’s good – it’s worth worrying about. But don’t panic, and don’t despair. You can do this.
We’ve written extensively elsewhere on the Cashry and other Goalry’s brands blogs about setting and using a practical monthly budget. No matter what your income. Take a little time today and read through a few of these articles. They’re not all that long, and we try to keep everything in plain, honest language. You can also find tips on cutting your monthly expenses. For instance by setting up apps on your phone to help you track your own spending. Or other apps to remind you of when bills are due, the power of micro-saving, and all sorts of other tips on squeezing out a few extra dollars each month in ways that make your life better, not harder.
Some debt can become manageable through restructuring. A debt consolidation loan doesn’t make your debt go away. It’s not a “get out of debt free” card. What it can do is help reorganize that debt so that you can keep up with it each month as you make systemic changes to how you handle your personal or small business finances across the board. A personal loan for debt consolidation can not only lower your total monthly payments. It can also reduce your overall interest rates and help eliminate all those miscellaneous fees and charges that are currently eating up your resources.
We can’t promise that taking more effective control of your finances will always be easy. It won’t always go as quickly as we’d like. But it doesn’t have to be as difficult as it often seems. Plus, you don’t have to figure it all out alone. When you’re ready, and if you need our help, let us know how we can help!
Blaine Koehn is a former small business manager, long-time educator, and seasoned consultant. He’s worked in both the public and private sectors while riding the ups-and-downs of self-employment and independent contracting for nearly two decades. His self-published resources have been utilized by thousands of educators as he’s shared his experiences and ideas in workshops across the Midwest. Blaine writes about money management and decision-making for those new to the world of finance or anyone simply sorting through their fiscal options in complicated times.
In the world of credit cards, Visa and Mastercard stand as two giants. Each offering…
Online shopping is typically associated with credit card usage. However, consumers should know that it's…
If you're like most people these days, your smartphone is an essential tool that you're constantly…