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The following is a guest post.
In the mission to attain financial independence, you must consider every aspect and road to your goal. You have constantly evaluate your financial position, and any adjustments you need to make along the way. The trick is to be dedicated to your goal as well as remain flexible to take advantage of opportunities or to make adjustments advantageous to your financial position.
It doesn’t have to be complicated, but you do have to be consistent in your actions. One of the best things you can do to increase your personal wealth is to assess your debt load and make some hard decisions about how to handle it. Although credit cards are an important part of your economic life, the truth is there is good debt and bad debt – and credit cards are generally categorized as “bad debt”. This is because credit cards can drain your funds without presenting any kind of return.
The notable exceptions to this are credit cards with cashback or reward programs. If you travel a lot for business or leisure, or if there are purchases you make regularly such as gasoline or groceries, if handled properly a credit card can actually pay dividends. However, such cards are not typically low APR credit cards, and if you don’t pay off the balance in full before the billing cycle ends (which is usually 25-30 days) you will end up paying much more than the savings in rewards is worth. [Kevin] If you’re not going to use the points regularly, it’s also yet another card to carry around in your wallet or leave at home.
Furthermore, miss one payment and you are facing steep late fees and a possible increase in your interest rate. The next thing you know, you’re in a credit card black hole of debt, and it’s very difficult to dig your way out once that happens. In this scenario, it’s a good idea to take a look at 0% balance transfer credit cards, and transfer the accounts carrying the highest interest rate to the 0% rate. Direct your focus to paying off the cards with the highest interest rate first – those are the ones costing you the most money.
The question of whether or not credit cards can help grow your wealth is tricky. It is possible to receive good returns on a credit card, but unless you are able to resist the temptation to spend and are able to pay close attention to how your cards are managed, credit cards are not a way to grow wealth. You’re better off establishing an emergency fund and paying cash as you go. Final answer: no, credit cards cannot reliably help you grow your wealth.
[Kevin] Credit cards can be very convenient, but with convenience comes responsibility as well. It’s too easy to simply defer the balance to another day. These 0% balance transfer cards can be a good tool if used to start getting on the path to paying down debt, and not simply as a way to carry your balance a little bit longer. You should also check the terms and conditions on the card to ensure that you won’t be in a worse spot than before, and take care to not miss a payment which will probably increase your rates.
Credit cards without responsibility and self-restraint are a financial disaster waiting to happen.
Hey Biz,
I completely agree. The high rates are a killer over time, but then again, the experience is usually painful enough that people are less likely to repeat it. What do you think? I’m not so sure I can say the same about cheap mortgage loans which are encouraging young people to go into a load of debt to purchase their first home — do we really believe that rates will stay low forever?
For us, the credit card does not help grow our wealth. We pay off the whole bill every month and try to use the cc as little as possible. Using cash works a lot better for us because we spend less overall.
I do use CC for convenience and points, but I never like the idea of having to pay interest on the balance!
Rewards or cash back cards may not make you wealthy, but it can help. I use my credit card for convenience and rewards. I take my rewards when I travel overseas. It enables us to travel better (first or business class) and save money. The credit card helps with cash flow.
I think credit cards can be useful money flow tools, just so long as you don’t keep a running balance in there. The rewards can add up over time.
My DH and I get about $100-150 per year on average from credit cards. It is not a lot but it sure helps. We also save money by using credit cards to get hotel points, this year we got room equivalent to $900 both in our home town for our wedding and in Hawaii. Those points add up. We also getting another night free later on this year for a friends wedding, worth another $100. And all of these are tax free.
That’s pretty interesting… yep, the points can add up over time! The credit card companies are only able to afford that via the merchant fees and via all the other people not paying their bills before interest is due, so it would be interesting to see what would happen if everyone stopped carrying a CC balance. 😉
We get about $300 back every year from our Discover Card. We always pay it in full each month & have not had any problems with it. We don’t spend unwisely just because we’re using plastic, and we use the same card for everything that we can. It works for us!
That’s a pretty good amount! I haven’t checked lately to see what I can get with my air miles…
I remember when we were doing our kitchen remodel, my credit card offered a 3% cash back promotion for 2 months. It was awesome. Since we put over $15,000 on our credit cards during that time, it was great getting almost $500 back.
I didn’t get rich but it certainly helped when I was going through a costly renovation.
If the $500 was more than any interest that you might have had to pay then it definitely seems like it was worth it!
CC’s can definitely grow wealth, relatively nominal in my case, but still nonetheless. if i think about the total monetary value of rewards accumulated in the last 12 months of CC usage, I’d estimate $4,000 either in cash back or money i don’t have to spend (i.e. miles / hotel pts). CCs are also great for working capital purposes when one is running a business.
That is quite a hefty reward accumulation! I guess in that sense if you are responsible with them they can leave you slightly better off.