How you use credit cards reveals a lot about how you manage your finances.
If you use credit cards but dread the monthly payments (like the 38% of Americans that carry credit card debt), you’re mismanaging your finances and using credit cards the wrong way.
If you avoid using credit cards because you don’t want to get into debt (like one-third of Americans), you’re missing out on cash and perks that can grow your money.
In this article, we help you decide whether you’re ready to use credit cards responsibly with our “Should You Use Credit Cards” quiz.
Then, we show you how to use credit cards to your advantage so that your credit is working for you instead of you working to pay off your credit card bills.
Why Credit Cards Are A Win For Minority Thinkers
People who think like the minority and are disciplined with their spending and financial planning can reap several benefits from responsible credit card usage.
What Is Responsible Credit Card Usage?
To use credit cards responsibly, pay off the entire balance every month and don’t use credit cards to buy things you can’t afford to purchase with cash.
Many people carry a balance on their credit cards and make only the minimum payments each month, which is irresponsible.
Credit cards are not a source of income, and when people use them to buy things they can’t afford, it creates three problems:
- People become accustomed to living outside their means.
- People build up debt instead of building wealth.
- High-interest rates can turn already-tight budgets into financial disasters that can limit their family’s lifestyle and future.
Minority thinkers don’t have problems with credit cards because they follow two simple rules:
- Use your credit card like a debit card — only purchase things you already have the money to pay for.
- Pay off your full credit card balance every month.
Credit cards get a bad rap because most people use them to finance things they can’t afford.
But, if you use your credit cards as a convenience instead of a crutch, you can enjoy several nice rewards!
The Benefits Of Owning A Credit Card
There are three types of credit cards worth considering that can generate the best rewards for you, your family, and your business.
1. Personal Credit Cards
Using a personal credit card for normal household expenses and purchases can put more money into your bank account if you choose a card with cashback rewards.
For example, let’s say you normally use your debit card to pay $3000 a month in expenses.
Then, you get a credit card that pays you 1.5% cash back on every purchase, so you use it (instead of your debit card) to pay your monthly expenses.
Congratulations – you just earned yourself $540 a year!
Using a credit card with 1.5% cashback on $3000 a month means you’ll get $45 a month in rewards, which equals $540 annually – and you don’t have to do anything except use your credit card!
As long as you pay your credit card balance each month, cashback rewards mean you earn a little profit on everything you buy.
2. Travel Credit Cards
A travel credit card can turn long travel into luxury experiences with perks such as:
- Access to airport lounges, where you get free food and a comfortable place to relax while waiting for flights
- Free hotel upgrades (sometimes with more free food)
- Rental car upgrades
- Free vacation packages
Travel cards are excellent for people who travel frequently, especially for business. If you only travel once or twice a year, they may not be the best choice for you. But if you travel regularly, the rewards can really make a difference!
3. Business Credit Cards
Business credit cards help businesses, freelancers, and self-employed people keep track of expenses, so they don’t lose any precious tax deductions.
When it comes to business expenses, good tracking means money saved through tax deductions.
Writing everything down is a challenge for busy business owners, but credit cards take work off your hands by recording transactions for you. Later, the system allows you to filter expenses by category, saving you a great deal of time when tax season rolls around.
Business transactions often run into the tens of thousands, so a business card that offers 1.5% cashback can earn you a nice profit.
For example, if you’re spending $35,000 a month on business expenses, a 1.5% cashback credit card returns $525 a month – $6,3000 a year – to your bank account.
Most debit cards don’t give you the same purchase protection, cashback, or perks that credit cards provide.
Using credit cards for personal, travel, and business expenses can put money in your pocket and let you enjoy a bit of that Gucci lifestyle without having to do anything more than paying by credit card.
The purchase protection plans and financial tracking systems built into some cards also make them handy tools for managing and protecting your finances.
Should You Use Credit Cards?
Credit cards get a bad rap because most people use them the wrong way.
Nearly half of all credit card users only make the minimum monthly payments, allowing their debt to carry over into the following months. Then, interest accrues, and that’s how debt can snowball out of control.
People with the Minority Mindset are disciplined with their spending habits and focused on building wealth throughout their lifetimes.
Minority Mindset thinkers are good candidates for credit cards, and are likely to handle them responsibly.
Still on the fence about whether credit cards are right for you? If you can answer “yes” to the following two questions, then it’s likely that you can handle credit cards responsibly.
Question 1: Can you live off of 75% of what you earn?
If your answer is:
- No: You’re not ready for a credit card.
- Yes: You may be a good candidate for a credit card.
If you’re not able to live off of 75% of your income, focus on expanding your means. Living on a tight budget is stressful!
To break out of the hand-to-mouth routine, you’ve got to do something different than you’re doing now. This usually means putting in some extra time to get more education or learn new skills, find a better-paying job, or start a new business.
Having an emergency savings fund in place is another essential component of living within your means. For example, if your car breaks down, your emergency savings will cover the cost of repairs — and you won’t be tempted to pull out your credit card for repairs you can’t afford!
If you are living off of 75% of your current income, then move on to question #2.
Question #2: Can you control your spending?
If your answer is:
- No: Don’t get a credit card
- Maybe: Don’t get a credit card
- Yes: You may be a good candidate for a credit card.
If you’re vulnerable to impulse buying, then a credit card may not be a good choice for you.
However, credit cards won’t hurt your finances if you can control your spending and use them responsibly.
If you answered “yes” to questions 1 & 2, you should consider getting a credit card.
Most Minority Mindset thinkers will handle credit cards responsibly because they’ve learned to live within their means and control their spending.
If you answered “no” to questions 1 & 2, you’re not quite ready for a credit card.
Keep learning about how to build wealth and focus your efforts on increasing your income and controlling your spending. In time, you’ll develop the discipline and budget you need to manage them responsibly.
7 Tips For Making The Most Of Your Credit Cards
Find out how to make the most of your credit cards and rewards with the seven tips below.
Research to find the best perks.
Before you sign up for any credit cards, be sure to compare the benefits offered by different cards.
For example, did you know that some will reimburse you if you lose or break the products you’ve purchased with your credit card?
Banks often get creative (and generous) with perks. Look for cards that offer the best signup bonuses, cashback rates, purchase & fraud protection, and other perks
Use your card often.
Earning cash and rewards only happens if you’re using your credit card to make purchases. Be sure to switch from your debit card to credit card when paying bills and making purchases.
Use your rewards!
More than one-third of credit card users have never redeemed any of their rewards. Don’t miss out! Know what your rewards and perks are, and take full advantage of them.
Avoid hoarding credit cards.
Limit yourself to 2 or 3 credit cards, and avoid adding extras such as gas or grocery cards. Managing accounts for multiple credit cards leaves you more vulnerable to accounting mistakes and can also eat up your time. Avoid making extra work for yourself by limiting yourself to one of each of the three credit card types (personal, travel, and business).
Use credit cards as you would use a debit card.
Only make credit card purchases for things you would normally buy with your debit card, and only spend what you already have the cash to pay for. Remember, credit cards aren’t an additional stream of income!
Pay your full credit card balance each month.
Avoid interest fees, debt, and bad financial habits by paying off 100% of your credit card debt each and every month. Your 1.5% cashback won’t mean anything if you’re paying 25% interest rates to earn it.
Avoid outrageous credit limits.
If your normal spending comes to $5000 a month, you don’t need a $30,000 spending limit. Add a little insurance to your financial plan by asking your bank to lower your limit to the amount you will need. This will help you avoid the temptation of big splurges or overspending.
Credit cards provide many nice advantages when you use them strategically. Keep in mind the tips above to make the most of your credit cards.
Credit Cards Provide Benefits For Personal, Travel, And Business Expenses
Choosing the right type of credit card(s) for your lifestyle means you can enjoy many rewards without having to manage your money any differently.
Use credit cards as a convenience, the way you would a debit card, to ensure that you don’t get caught up in interest payments or debt.
When you use credit cards responsibly and take advantage of the rewards, you can enjoy extra cash, luxury perks, several protections, and easier year-end tax preparations.
How Using Your Credit Cards Can Give You a Financial Advantage
There’s little at your disposal that can help you financially more than a credit card. Sure, you can always spend your cash when you’re on the go or you’re out and about, but a credit card actually comes with a lot of power packed into that plastic. It can help pay your bills and get you perks in various situations, but if you’re not careful you can end up carrying a balance forward each month, negating any of the benefits.
In fact, how to use credit cards to your advantage is actually an exercise in patience. Cash back on purchases and other credit card perks are a great way to make your expenses work for you, though if you’re in the habit of buying things that you can’t really afford, that credit card could also be your downfall. That’s why it’s important to only charge things that you can afford to pay off in short order, otherwise that mounting debt will come back to bite you.
With that being said, here’s how you can use credit cards to give yourself a financial advantage:
Be Aware Of Your Credit Utilization Ratio
One of the first steps in using credit cards responsibly is to be aware of your credit utilization ratio. It sounds complicated, but it’s basically the percentage of the credit you’re using against the credit you have, across all your cards. If you have a credit card with a $5,000 limit and you’ve used $2,500 of it, that’s a 50% credit utilization ratio. It’s important because the more credit you have, the better you look to lenders.
Generally, if you want to use credit to your advantage, you should be keeping your balances under 30%. If your debt exceeds 30% of your credit, it can affect your credit score and whether or not you qualify for loans and other financial products. Credit utilization accounts for about a third of your overall credit score, and lenders and financial institutions alike will look at your credit utilization when considering your standing.
Protect Your Credit Score
While your credit score may seem like a complicated algorithm that signifies your credit history and your debt responsibility, it’s one of the most important aspects of your financial life and with our helpful guide, it can be much easier to understand. A low credit score means you’ll qualify for better rates, more perks and lower annual fees, which can help you be a better steward of your financial life.
Anytime you apply for a new credit card — whether you qualify or not — you’ll likely experience some sort of impact on your credit report, but a new card can actually help you improve your credit score, even if you don’t use it. That’s because your new card will increase the amount of credit you have without increasing your debt, and it’s also why using credit cards to your advantage means keeping those old credit cards open even if you’re not using them.
How To Use Credit Cards the Right Way
Using credit the right way can help you be more responsible and get more out of these powerful financial tools. But before you charge that next big purchase, ask yourself if you can afford to pay it off in full this month.
If you can, go ahead and purchase and then pay it off as soon as possible. You’ll get cash back perks from the purchase, and when you pay it off in full you’ll be back to your ideal credit utilization ratio. If you can’t afford to pay off that purchase in full this month, consider holding off and building up a buffer before you make that purchase.