The secret weapon that you didn’t know you had.
Some of you may think that credit cards are a dangerous debt trap that will let banks make money off you and ultimately ruin your life because they’re the most evil thing ever created.
(possibly a slight over-exaggeration…)
They could be – when not used properly. I’m here to explain to you how you can master this tool, and how it can benefit you. Let’s start with the obvious…
What is a credit card?
Physically, it’s a piece of plastic with some numbers on it. Sometimes you swipe it or insert it into a machine. Other times you may just tap it against a terminal.
Financially, it’s a method of borrowing money from an Issuer (like a bank) to pay for goods or services (like shoes or a haircut). You’ll need to pay the money back by a specific date, otherwise you will need to pay additional interest on the amount you have borrowed.
Obvious, right? But what so many people (especially early on) don’t realize is that a credit card is not just a shopping spree at the mall. It’s a tool to help you grow your financial-self.
Pros and Cons
Knowing the pros and cons can help you understand the power of a credit card, while avoiding the pitfalls.
Pros to having a credit card:
- Build your credit (learn more in my article Keeping Score)
- An easier method to pay expenses in bulk
- Accumulate rewards points to get other benefits
- Get cash back
- Sometimes more generally accepted than a debit card
While these are great advantages, some cons to be aware of are:
- Can be very bad if you can’t control your spending
- You can end up building a lot of debt
- Could hurt your credit score
Know the Power of the Card
Now that we understand the pros and cons to having a credit card, it’s time to understand the power of the card.
Yes, the cons seem kind of scary, but the pros are definitely more rewarding and worth the risk. These cons are all completely avoidable, and learning to properly manage the risks will open the opportunities for you to take advantage of the benefits.
So it all begins with knowing that you are in control.
You control this credit card. It does not control you.
I cannot emphasize this enough. Knowing this from the very beginning is the secret weapon to making sure you avoid falling into debt and killing your credit score.
Keep track of your balance
One simple habit I’ve built is always knowing how much I’ve spent on my card. I typically check my credit card balance once a week (this includes the total across my Posted and Authorized transactions).
Checking once a week works for me because I can usually adjust my spending until my next paycheque. But if you find your credit card spending getting away from you often, check on it maybe twice a week or every other day.
Don’t exceed your income
The key is to know how much you’ll need to pay towards it later, which should not exceed your income (see Surviving in Quicksand).
A magic wand to build credit
The ultimate power of your credit card is using it as the magic wand to build your credit for the future. Depending on how old you are, this may not seem important right now, but trust me, you will be doing your future-self a huge favour.
Let’s just say this could be the difference between living paycheque to paycheque, or living in luxury.
Master the Card. Master your Future.
I’m not trying to convince you to get a credit card. By no means do I want anyone to fall into a vicious cycle of spending and debt.
But there is a huge upside to mastering this tool that can help improve your life for the future – and I would hate if you weren’t aware of the possible advantages that await!
Remember, do your homework, do your research. Don’t just trust what you’ve read here, make sure you have all the info you can find to make the best decision for you about how mastering the credit card can unlock the world of possibilities for you and your money.