What Do You Know About Credit Cards?
By: Opher Ganel
Tags: Credit, Debt, Money, Finance, Financial Strategy

Credit cards are incredibly convenient.

A wallet-sized piece of plastic weighing as little as 5 grams (about 1/6 of an ounce), with zero intrinsic value, lets you make purchases of thousands of dollars or more (depending on your credit limit).

According to a fascinating history from creditcards.com, the first recorded instance of using an instrument that had no intrinsic value to represent a monetary transactions dates back to ancient Mesopotamia, 5000 years ago. Back then, it was an unwieldy clay tablet.

According to that history, the first credit card in the modern sense of a wallet-sized card offering revolving credit was Bank of America’s Bank AmeriCard. It debuted in select California markets in 1958 and went national in 1966.

Why We Get Credit Cards

According to The Motely Fool, here are the top 10 reasons Americans open credit card accounts (with, in parentheses, my assessment of each reason).

To build credit history (good) To have a cushion for emergencies (not great, but ok) To earn purchase rewards (very good) The convenience of not having to carry cash (fair) To make purchases I otherwise could not afford (mostly bad) The type of rewards offered (good) To help my monthly cash flow (good) To help manage my budget (good) Fraud protection (great) Balance transfer/debt consolidation (very good if part of getting out of debt)

Americans apply for 58 million credit cards each year, according to The Motely Fool. Their reasons range from super-savvy to downright foolish.

A bonus great reason is to to make safe online purchases, where you can dispute a payment if you never get the product or service for which you paid. Better yet, if someone steals your credit card information, most issuers won’t even hold you accountable for the $50 allowed by law.

Credit Card Basics

In a piece I wrote a while back, I detail the basics of credit cards, including definitions of Credit Limit, Annual Percentage Rate (or APR), Minimum Payment, Annual Fee, Cash Advance and/or Balance Transfer Fee, Penalty Fees, and Foreign Exchange Fee.

Summarizing from that piece, here are my 9 tips for using credit cards well:

Avoid buying with plastic things you wouldn’t buy if you had to pay cash. Each month, pay off your balance in full Set up payment-due reminders, whether through your card issuer sending you a text message, or using your calendar. Get cards that offer rewards that make sense based on the amounts and types of purchases you charge. Get cards with no annual fees. Higher credit limits reduce your credit utilization ratio, which improves your credit score. In general, avoid getting new credit cards more than once a year, since creditors look at the number of accounts you opened in the last two years and prefer that number to be no more than 2. Some issuers will close your credit card account if you stop using their card for a year or two, so use each of your cards at least periodically. Understand the details of your cards’ APR, fees, and penalties, so you can make informed decisions.

The most important tip for using credit cards wisely: avoid buying with plastic things you wouldn’t buy if you had to pay cash.

A piece from Jim Katzaman describes how credit cards can be very good for you (and when you might want to stick with cash). His recommendation on what cards to get include:

A cash-back reward card for your everyday spending

A card with higher rewards for the category(ies) you spend on most

A specific store card for the place you shop the most, whether in-person or online.

His recommendation on what to do when you first get your card:

Right after you activate your new card, set up auto-pay to pay it off in full each month

Put a sticker on the card with its benefits so you remember which card to use where

Put every purchase possible on your credit card, to more easily keep track of your spending.

The Second most important tip for using credit cards wisely: pay the balance in full each month to avoid paying expensive interest.

Rewards, Rewards, Rewards

This is one of my favorite aspects of using credit cards.

A primer from Chris Backe provides a lot of useful info on credit card rewards.

This includes his list of the more common types of credit card rewards:

Free hotel upgrades

Priority boarding

Free Global Entry (a savings of $100 application fee)

Free TSA PreCheck (by itself, an $85 savings)

Access to certain airport lounges

Free checked baggage

Concierge services (event booking, finding restaurants, etc.)

Rental car insurance

Travel protection and assistance

Travel insurance

Lower (or preferably zero) foreign transaction fees.

In another recent piece I offered my best tips on how to make money from your credit cards. These tips help me “juice” my savings by an extra 1.5% each year! These tips include:

Avoid fees

Don’t pay interest

Get the highest cash rewards you can

Don’t buy anything just because of the rewards

Avoiding Credit Card Debt

Credit card debt can cost you big-time.

The biggest costs are interest (obviously), lower credit scores (even if you keep your credit utilization score far below 30%!), stress, and the opportunity cost of not having the money to buy things you need and want more than what got you into your debt trap.

A Trap to Avoid

Credit card issuers love high-earners who charge a lot, even if they never pay any interest or fees. However, they don’t mind at all collecting fees if you happen to find yourself in a bind. They even make it seem like it’s “interest-free.”

Don’t buy into that!

A recent “interest-free” offer I got actually would have cost me the equivalent of 9.1% annual interest!

The Bottom Line

Credit cards are incredibly convenient.

They’re like financial “power tools.”

Like real power tools, they let you do more easily things that would be much harder if you didn’t have them. However, using them without knowing how can be very dangerous.

The above will help you know more about these tools, so you can get their benefits without harming yourself.

About the Author

Opher Ganel has set up several successful small businesses, including a consulting practice supporting NASA and government contractors. His most recent venture is a financial strategy service for independent professionals. You can connect with him there, or by following his Medium publication, Financial Strategy.

Disclaimer

This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.