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Are Credit Cards really worth it?

Started by Hayden, September 11, 2018, 08:09:29 AM

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Hayden

Hi FS Community,

Just a quick background... I am 21 years old about to get married in three weeks. We are renting a condo for the first year and focusing hard on building retirement and non retirement investments. We hope to buy a rental property before our first home. My fiance and I have been very diligent and worked extremely hard to get through college both debt free. We avoid any sort of loans at all costs. We just purchased a used vehicle for us using the 1/10th rule of buying a car. With our mindset always avoiding loans, even short term credit card balances do not sit well with me. I had a credit card for about five months then closed it because of not liking the month long balance sitting there waiting to be paid (or paying the balance as I use it being annoying). I also do not really buy into the airline miles and cash back being a viable reason to get a credit card due to having to spend a lot more than I would otherwise to maybe one day get a free coach seat to Colorado and back.

I'm told all the time that you need credit to survive in the financial world with insurance premiums, rent, buying a house, and qualifying for loans down the road. However, my mindset is just to save like crazy and use cash flow to build up enough equity to where my credit score is irrelevant.

What are your thoughts on credit cards assuming that the balance is always paid in full? Is it worth the 1% cash back and the hassle or is it better to simplify your financial life and focus on building cash?
Very Respectfully,
Hayden

Sam

Using one or two credit cards to take advantage of the benefits is a no brainer. So long as you pay the balance in full each month, you are taking advantage of them with their benefits, insurance, and free 30 day loan. Where people screw themselves is when they just can't control their spending because credit card companies have the highest interest rate of all loans. That's why there are so many credit card affiliate sites and huge mega cap credit card companies.
Regards,

Sam

Orphan

A couple of credit cards with a credit limit five to ten thousand each is good to have for your credit rating.

Payed off immediately is obviously the thing to do as you already know. It shows the three main credit bureaus that you do not use those credit cards for living expenses and that you use credit responsibly.

JMHO

Hayden

Quote from: Sam on September 11, 2018, 08:37:46 AM
Using one or two credit cards to take advantage of the benefits is a no brainer. So long as you pay the balance in full each month, you are taking advantage of them with their benefits, insurance, and free 30 day loan.

Sam,

Would you say that it is critical to financial success? I totally agree with you that people getting trouble when they overspend with them. I have a handful of peers that have tens of thousands of dollars in credit debt and they don't even have a degree yet.
Very Respectfully,
Hayden

IzzyEsq

I don't think credit cards are essential to financial success, but they are a very handy tool for people who have enough self control to avoid carrying balances.  This is especially so with cash back/rewards cards that essentially pay you to use them.  I have an assortment that I use for paying regular expenses, and getting cash back is a nice treat.  Shop around for cards that give you more than the standard 1% on categories of expenses that you would be racking up anyway.  I've got one card, for instance, that gives me 4% on gas and 3% on restaurants (including fast food joints) that I jokingly refer to as my road trip card.  I found a business card that gives me 5% back on my internet bill.  These little perks add up.
All the best,
Brenda

Sam

#5
Quote from: Hayden on September 11, 2018, 08:49:48 AM
Quote from: Sam on September 11, 2018, 08:37:46 AM
Using one or two credit cards to take advantage of the benefits is a no brainer. So long as you pay the balance in full each month, you are taking advantage of them with their benefits, insurance, and free 30 day loan.

Sam,

Would you say that it is critical to financial success? I totally agree with you that people getting trouble when they overspend with them. I have a handful of peers that have tens of thousands of dollars in credit debt and they don't even have a degree yet.

Credit cards were not critical to my financial success at all. It was really taking risks investing and then working more hours in the day than the average person that really paid dividends. Since I graduated from college I've been between 5 AM and 6 AM working. So if you add those extra hours up over a 19 year period, it helps!
Regards,

Sam

Cindy

Credit cards are worth it for people that people have the self control to not overspend and who have the discipline and means to pay off their full balance every month.  If you fall into this segment, CC's offer the convenience of not having to carry cash everywhere you go, easier record-keeping of your expenditures by category over a period of time, cash-back/points/miles for spending on things you would be spending on anyway, plus it builds up a credit history for your with future creditors like when you buy a home.

If having credit cards makes it too tempting to spend more than you have (where you can't pay of your monthly balance) or even just spending a lot more than you typically would, they aren't worth it.  In the former case, because no points/miles make up for the interest you are paying  and you'd be in consumer debt and in the latter case, because it might prevent you from hitting your personal financial savings goals. 

rtysmith

Also - I find I always want to secure credit (even expensive credit) when I don't need it. I always pay CC's off, but use for the miles and try and have a high limit in case I ever need it (nothing like knowing you can buy a car with you credit card if you had to). My HELOC is the same - costs $80/ year but offers 250k in credit at a low rate if I need it.

Jeffolucky

I've found a credit card very useful for flying miles. I used it in my business, paid it off every month and accumulated enough mile to pay for 35-40 tickets (at least 25% were first class) and still have about 1.2 million miles left to use. Been a very good tool for me!

Leigh

As a financial counselor, I can't tell you how many times I have sat with someone who had no credit history and had a all-credit-is-a-demon mindset because they grew up listening to a particular radio show host who...dare I say...is not a financial professional.  Yes, he has helped millions pay off debt and get spending under control and that is GREAT...but, so many were taught credit is from the pit of hades and that led to fear in getting a credit card.

YES...credit cards can be used responsibly! YES...they can be a tool and resource to build good credit history! YES...you can find amazing card benefits.

Gaining credit history is one reason to get a card.  Just buy your groceries on the card, subtract the amount in your groceries budget and move the number to your credit card column. Easy peasy. Pay it off at the end of the cycle.

15% of your credit score is made up of the age of your credit lines. If your parents put you on a credit card as an authorized user (piggy back credit) (and hopefully they paid their bills on time), you get the advantage of that long time credit line. If you do get a card or two, don't close the earlier one if you can avoid it, assuming it is a no-fee card. The older that credit line is, the better. And pay it on time!  Your on-time payments contribute to 35% of your credit score!

Car loans, mortgages, school loans all contribute to your credit history and credit score, but a credit card is quite easy to get this history started.  Again, if owned responsibly!

I tell all of my female clients who are in a traditional role of homemaker to get a credit card in their name only. So many women are an authorized user on their spouse's account, not realizing that if that spouse left, she would be in trouble not having access to a credit card, which she might need for daily living expenses.

The amendment to the Card Act allows a stay at home spouse to apply for a card using joint family income as long as he/she has reasonable expectation to have access to those funds. I also recommend women to get a card with a limit high enough to pay for a divorce lawyer juuust in case.  8)

For me, I have one card in my name (hubby is authorized user) that is no fee and 2% cash back. I got it to use at Sam's because at the time Master Card was the card of choice.  I also have a Chase reserve card which has a fee but also has incredible premium benefits. I am a joint owner on a chase account and an authorized user on an AMX account.

We charge everything and I mean 100% of all purchases on our cards. We get cash back, flights, travel insurance, free food & drink at airport lounges, doubled warranties, hotel upgrades, free TSA membership, free emergency medical if 100 miles from home, tons of free stuff just from using it for my monthly budget purchases.

But. I pay it all off every month. Every time.

That doesn't mean I couldn't need emergency money one day. I might. And I would have access to it with the card.

Also....debit cards don't provide the protection in the event of fraud or an issue with a retailer.

So yes, I pretty much love credit cards. WHEN USED RESPONSIBLY.

Hayden

Quote from: Leigh on September 12, 2018, 05:49:00 AM
YES...credit cards can be used responsibly! YES...they can be a tool and resource to build good credit history! YES...you can find amazing card benefits.

Leigh, thank you for the insight! I think you are right on the money(no pun intended). Can you let me know what card you would recommend in my situation? I really do not want a bank issued credit card and I am pretty ignorant when it comes to all of the other cards.
Very Respectfully,
Hayden

Leigh

#11
Hi Hayden,

It depends. There are actually several really good unbiased websites where you can peruse the various card offerings. Do you have any credit history? Have you checked all three of your credit files this year?
I mention that so that you can first, before you apply for a card, ensure, ENSURE that there is not any erroneous information on any of your credit files.

No one is looking out for you when it comes to your credit files! It's up to you to keep any eye on these (and no, I'm not talking about going to credit karma to look at your credit score.) Check it well at www.annualcreditreport.com and make sure no data is incorrect. You are entitled to one free credit report per year. Check all three! Experian, Equifax and Transunion and do not pay to do this! It is free!

If you find wrong info, file a dispute and make sure all is well before you apply for a card.

Okay, once you know that a creditor is viewing accurate and up to date info on you, you want to make sure you have chosen the card that will give you the most benefit.

First look for no annual fee. The only time I pay a fee is when I am using a high premium card that is giving me the most bang for my buck,  but for a card for you, I would say look at where you want the most benefits.

Do you travel a lot? Do you want to grow miles? Hotel benefits? Cash back?

Do you bank at a credit union? If you don't have a credit history file, and need to build credit, you could get a secured card from your credit union. Then over time, as you build your positive history, the credit limit can be raised.

Keep one thing in mind as you grow older. An important number in your life is your debt to credit ratio. That is the debt you owe divided by the amount of credit you have access to. This number makes up 30% of your FICO score. If you have one card, say with a $3K limit and you charge $1500 per month in groceries, gas, miscellaneous...then you are using a whopping 50% of your credit! That's a big no-no. Keep that number under 30%.

Which can be done with two cards. GASP! Did I just tell you to get TWO credit cards!?  :o 

If you can manage them responsibly, and pay them off each month, then yes, yes I did. It will give you a lower debt to credit ratio overall.

AND ALL OF THIS IS SET AGAINST A BACKDROP OF RESPONSIBLE CHARGING, ONLY BUYING WHAT YOU NEED AND PAYING IT OFF EACH MONTH. Period.

So to summarize....choose what benefit you want the most, cash, hotel points, miles etc and research at one of the credit card comparison sites. But...make sure you have double checked your credit reports before applying!   :)

KAT1809

A credit card came in very handy for us one trip back to visit relatives. 

Sometimes we drive cross country three LONG days for our visit, sometimes we fly out and rent a car.  On this particular trip we flew out and rented a car using a credit card we strictly reserve for our travels.  (We might have even used air miles earned with a different card to purchase our flights; I can't recall at this point.) Prior to our trip I had read all the fine print associated with three of our credit cards and discovered this particular card would provide primary car insurance on the rental car as long as I declined the insurance provided by the rental car company, which I made sure to do at the time we picked up our rental car.  As it happened, about half way through our visit, someone rear ended me, significantly damaging the rental car.  The credit card company handled everything.  I just had to submit the appropriate paperwork when requested. While it took many months before the issue was resolved and closed, I did not have to pay anything up front, and it was the credit card company that handled all the back and forth with the other person's insurance company.

So read your card benefits carefully, and make sure to use the card with the best benefit for the activity.

KAT1809

The following approach to credit card use is NOT recommended for the average credit card consumer.  ;)

Since we typically plan our annual three week international vacations a year in advance, we make good use of those 18 month long 0% teaser rates by using a no interest credit card to charge vacation deposits (needed to reserve our booking) in one tax year, then pay off the balance in the next tax year - using earmarked funds from our tax deferred rollover IRAs.  This helps us to keep our taxable income low in the current year because we are deferring a large taxable withdrawal into the following tax year.

The keys to this approach are:

1. You have to make sure you have the funds available in your IRA. The funds should be in the lowest risk allocation bucket of your IRA assets since you are using them for expenses within a year.
2. You have to be old enough to withdraw from the IRA penalty free.
3. You must pay off the credit card balance in its entirety before the end of the 0% interest rate period. Pay close attention to when the 0% interest rate ends!
4. You do not get depressed having a credit card with an on-going non-zero balance.
5. You need to remember that a certain amount of your IRA funds are earmarked for a future credit card payment.  No double dipping!

If you have the discipline and the in-hand financial assets (no counting on future potential work bonuses for this!), then there is nothing wrong with making use of a 0% interest "loan" from the credit card company.  ;)

Hayden

Quote from: KAT1809 on September 22, 2018, 10:20:21 PM

2. You have to be old enough to withdraw from the IRA penalty free.


This is a hefty requirement. Do you find it easier to juggle all of that with the credit companies and your balance? Is it really an ROI on the hassle factor?
Very Respectfully,
Hayden

KAT1809

Quote from: Hayden on September 24, 2018, 08:24:57 AM

This is a hefty requirement. Do you find it easier to juggle all of that with the credit companies and your balance? Is it really an ROI on the hassle factor?

We typically only have one credit card with a 0% interest rate.  Since we are over 59.5, we can access our rollover IRA on an as-needed basis penalty free.  However, our self-imposed limitation is managing our IRA withdrawals such that our annual income stays within the lowest tax bracket possible for married filing jointly.

So far we have only tried this 0% "ride" for vacation deposits for two different (new) credit cards.  Ok, one time we used a third new credit card with 0% interest - and $0 balance transfer fee! (not to mention zero card fee!!) - to transfer balances from all our other cards during the introductory $0 fee / 0% interest time period.  We would make the initial charge on our rewards cards, then move that balance (fee free) over to the new fee free / interest free card.

There are some things I forgot to mention in my original post:

1. A significant period of time elapsed between applying for the various 0% interest rate cards. Probably about a year or more between each one? They were all unsolicited credit card offers.

2. I'm the primary account holder for Card #1 (which we rarely use, other than paying for a rental car when on vacation due to the good primary auto insurance).  My significant other is the primary account holder for Cards #2 and #3.  Due to some unexpected life events, the balance on Card #2 is quite a bit higher than I would like - within a couple k of its credit limit - but it will be paid off in January 2019 (using our IRA mutual funds' long term capital gains expected to be distributed in December 2018). Card #3 is only used when it has a 5% cash back rewards deal going on for stuff I would be purchasing anyway that quarter (ok, it's a Discover card).

3. Since we are both retired, there is no hassle factor, other than having to carry the (growing!) balance as a liability entry in my monthly net worth spreadsheet.

Since being able to stay within the lowest tax bracket possible for married filing jointly makes my significant other SO VERY happy, that ROI is PRICELESS. ;)

I should also mention I have an Excel spreadsheet file with our expenses/income plans for 2018 though 2025 (each year is a separate worksheet) that helps me forecast which tax bracket we will likely end up being in for a given year.  We typically reserve the last quarter of the year to make any necessary income (i.e., IRA withdrawal) adjustments to stay in the lowest tax bracket possible. That is when a 0% interest card really comes in handy!

Hmmm ... maybe that's why I've never started a blog: I spend WAY too much of my time on complicated Excel spreadsheets. LOL

RageCage

The Citi 2% cashback card is the best deal IMO.  No fee and we always pay off balance.  Good way to easily identify and track your spending and before you know it you have a nice sum waiting for you to use.  So popular that the Wall Street Journal just posted yesterday how the merchants are trying to rebel since everyone using them now.  Why give up the free bonus money?...

Rdizzle

With proper use, mindset and self control I've found credit cards are amazing at improving overall quality of life and lifestyle. I plan to cover the travel related benefits in a separate post in the travel forum but just developing a healthy credit history from an early age gave me many huge advantages. Just like investing on margin can be both highly lucrative or a huge mistake depending on how you used it. I'm squarely on the side of embracing credit cards.

surpass

I have a fidelity 2% cash back card that give me that back on all purchases and then deposits the cash into my checking account.  So i'm basically getting a 2% discount on everything I buy and I also pay it off at the end of each month.  So don't buy anything that you can't pay off when the bills comes.

deific

Credit cards offer me fraud security that my debit card cannot. I put all (outside of mortgage) my expenditures in a month on credit and pay off the full balance each month. I do believe playing the points game and manufacturing spend is a dangerous path though. The result of this is that when I want to go away for the weekend with my wife, I pay for my hotel in points. When I fly to Florida for a week with my family (5 of us) the flights paid for.