I paid off my credit card balances. Yes! A zero balance.
I still have a truck loan and a HELOC, so I am not completely debt-free. But I can look at my budget and breathe easier. I took a small but temporary hit on my FICO score, because I closed one of the three credit card accounts – it had a high annual fee ($95) with reward miles that I was struggling to use. I don’t travel much when on a strict budget, and I didn’t care for any of the magazine subscription offerings.
Next month I will have a balance on my two remaining cards – but the charges are monthly fees that are listed in the budget and will be paid off in full when the statement comes. This is the way I used cards BBLE (Before Big Life Events), and I am so happy to be back to that system!
Credit cards are not evil – they only enhance the money mindset problems we carry.
It is easy to blame the banks or the credit card companies, but it really isn’t their fault when you start to build debt. It’s yours. Step up and own it. Figure out why you landed in that position, examine limiting beliefs about your life, and choose to move forward.
So let’s look at the positive ways credit cards can help you, when religiously paid in full every month:
Disclaimer: I’m not a lawyer or a financial planner, so please take my information as such and consult your own experts regarding the direction you should take. Your mileage may vary!
They can save you money.
- My two remaining cards have cash-back options. I receive 5% back on specific purchases each quarter. They vary from gas to groceries to home improvement, and you have to sign up for them each quarter. The tricky part for me is remembering which card is carrying which cash-back special! Sometimes I will go to a home improvement store and use a charge card, thinking it has a 5% cash-back option. Then I get home and find out that it was the second card that had the option. I still haven’t found a way to remedy this, but I might use a card cover (in my frugal world, this means the cut end of a used envelope) and write the cash-back options on the cover.
They can help you qualify for a mortgage.
Lenders take a look at your FICO score as part of the qualification process. It was once considered a bad thing to have credit cards with no balances (and lenders sometimes suggested closing these accounts), but they no longer count these accounts against your DTI (Debt to Income ratio). Dan Green of the Mortgage Reports has a great post about the new credit card rule.
They can help you with gifts.
Some credit cards offer cash-back in the form of gift cards, or rewards that can be used at other stores. Personally, I am not a fan of these. As I mentioned above, I got stuck with some air miles. I ended up dumping them into a flight I made for a family event, and used them for a first class upgrade. It was nice, and better than a subscription to Golf Digest. But it wasn’t something I would have done if I didn’t have the miles. In a way, maybe that is a benefit – forcing you to use miles outside your usual comfort zone. Now, back to the gifts. If you have points or rewards that you can use for holiday or birthday gifts, it can ease the burden.
They can make returns easier.
I have returned a few items to local or online stores, and it is always easier to have them make a refund on the same card. The cash returns sometimes don’t land back in my designated cash envelopes (yes, I use cash envelope system in combination with separate banking accounts and credit cards). Large purchases can be tracked. I was overcharged for a car rental, and I was able to call the agent and solve the problem fairly easily.
Speaking of car rentals, you need to present a credit card to the agent upon rental.
Some car rental agencies will accept a debit card for a deposit, putting a hold on some of your money in your account. If you are on vacation, that might be a problem, not only with your current expenses but with your automatic bill-paying at home. Steven Vanderpool at Nerdwallet explains car rentals here.
They can save you money, part deux.
If I pay for my heating oil within 10 days of delivery, I receive a 5% discount from the oil company. So I call them up and pay right away, using a credit card. Sometimes if I am lucky, I also receive cash back from the credit card company. At the end of the month, I pay off the balance.
You can check your FICO score on your credit card site without a hit to your score.
Both my remaining cards have this option, and I use it. I want to know where I stand on my credit journey!
Credit card companies protect against fraud and overdrafts.
I do not have a debit card. Yes, I could dispute the charges if someone steals debit card information. However, it may take a while for stolen money to return to my account. That could be a big problem when you are on a budget! I check my credit card and bank accounts once per week to make sure there are no fraudulent charges and keep a close eye on spending. A few years ago, someone used my credit card to buy Justin Beiber tickets. I found the charge within a few days because I check my accounts regularly. The company removed the charge and sent it to the fraud division. Sorry, Beibs – you aren’t in my budget.