For better or worse, credit cards have become the way we pay for things. These are incredibly useful cards, which make it easy to pay for purchases, move money between countries quickly and easily, and can act as a free loan from the bank. But because there's nothing to stop you from spending more than you have, they can become very, very expensive if used incorrectly.
The banks work hard to make it as easy as possible to accumulated debt on your card. They constantly increase your credit limit even if you don't ask for it. They advertise a "minimum payment" that is just a tiny fraction of what you owe on the card. And every now and again they'll actually process your payment slowly in order to charge you late penalties - if this ever happens call them and don't hang up until they've refunded you.
Using a credit card responsibly can provide you with great rewards, and simplify your financial life.
Never Think About Minimum Payments
In the end, you have to pay for everything you buy, whether you buy it on a card or in cash. If you fail to pay your card off every month, you can easily end up paying many times the cost of the item. Worse, credit cards are absolutely the most expensive money you can borrow. I cannot stress this enough, but if you don't pay your credit cards off every month, it's time to start. There are innumerable resources about the details of doing this, and I will probably write more on it later, but the fundamentals are simple. If you haven't paid your card off, you will pay interest on every item you buy starting the day you buy it. If you pay your cards every month, you get an interest free loan that generally lasts 15-45 days. This loan can be used to reduce your financing charges on other loans.
First option - obtain a new card that you WILL pay off every month. Use any excess cash to pay down other debts, starting with the highest interest rates. If you cannot make this payment for even one month proceed to option 2.
Second option - stop using credit cards altogether, stick to cash. This will lose you the benefit of the interest free loan, making this the inferior option. But if you have an overspending problem on credit cards, it will be cheaper in the long run.
Under either option, minimize your spending, and then pay whatever is leftover towards your outstanding balances on your old cards.If you have a decent credit rating, investigate lines of credit to pay off your balances. They are substantially cheaper than carrying a balance on your card, and only charge interest on what is owed - not all of your spending like a card does.
Taking Advantage
With your credit cards paid off in full every month, you now effectively have an interest-free, short term, loan for everything you spend on your card. This is great. If you put as much spending as you possibly can on your card, let's say $1500 per month, that means that on average your bank account is about $750 fatter than it would be paying everything in cash. Interest rates are very low right now, so over the course of the year, this might mean an extra $7.50 or so in interest...nothing to write home about. But it wasn't so long ago - and probably won't be so long into the future - when you can get 4% or 5% for your savings...that's about $40, a nice dinner out. These small things add up, and it's cost you nothing. If you are using the interest free loan to reduce other debts, the payoff can be even higher.
Points cards
About the greatest benefit to using credit cards is the points that are offered. Some credit cards give you travel points, some give you straight cash back, some will make a donation to your favourite charity. The first two are great options, but using a card to make a charitable donation is a bad idea. If you want to use your credit card rewards to fund a charity, get a cash back card and make a donation when the rewards come due. This way, you get a tax refund, which can be a substantial portion of the donation. In a future article, I will compare several Canadian and US credit cards and the rewards they offer and try to pin a dollar figure on to those travel points.
The end result is that credit cards are beautiful things. Use them wisely and they can be your best friend. A credit card is only a bad thing if you are spending more than you are earning, and then it's just a facilitator, the problem is still your spending habits.
