Saving Money Using Credit Cards

Credit cards are fast becoming the most common form of payment in North America and around the world. This is unfortunate for business owners who have to pay up to a 3% merchant fee on everything they sell via credit card, but at the same time it is becoming more lucrative for savvy consumers as creditors begin to share their profits with consumers to entice them to use their cards. This profit sharing comes in the form of non-taxable rewards that include points, air miles, cash back, travel insurance, extended warranties, and many other potential benefits. Unfortunately, all of this overhead inevitably translates into higher shelf prices for products to make up for the money lost to credit card companies in merchant fees. However, if you aren’t one of the people leveraging credit card rewards, or at least demanding a cash purchase price discount when shopping, then you are a victim of higher pricing without any rewards kickback.

Therefore, it might seem foolish not to sign up for a good credit card, right? Actually, that’s not always true. Credit cards are a very dangerous form of payment that can easily find the average consumer in mountains of debt by spending money that they never had. Once that happens, you are stuck paying ridiculous interest fees as high as 30% annually and you end up in an ever deepening hole that you can never get out of. Many personal finance advisors actually recommend that you never sign up for a credit card and pay for things using strictly cash. In some cases they will even advise against the use of debit cards because, similar to credit cards, they make money too easy to spend.

Personally I put all my spending, down to even the smallest items, on one of my several credit cards, depending on which one offers the best rewards and perks in that situation. By doing so I have received thousands of dollars worth of real tangible rewards that include a free trip to Europe for my wife and I including airfare and hotel, hundreds of dollars in cash, free flights all over Canada and the USA, hotel upgrades, along with various gift cards and merchandise. I am also very prudent with money and never spend more for anything than needed and, as such, am able to successfully live well under my means. If self control and overspending wasn’t an issue for many people, I would recommend that everyone have at least one credit card and to never use cash!

Before you make the plunge, please make sure you keep the following things in mind.

Credit Card Dangers:

• Money is incredibly easy to access and spend when compared to the routine work of using cash and other forms of payment.
• Recklessly applying for and using credit cards can negatively impact your credit rating for up to 7 years into the future or more.
• Interest rates are often insanely high, sometimes reaching 30% per year on unpaid balances.
• Each credit card application forces a “hard pull” on your credit report which can temporarily lower your credit score.
• Many cards come with annual fees that can potentially nullify your rewards.
• Cash advances that are immediately charged interest from the very first day.
• Payments are often applied to the lowest interest charges first, so you end up paying high interest longer!

Attributes Of Successful Credit Card Users:

• Entirely committed to paying off the entire credit card bill every month.
• Certain spending won’t increase by using a credit card.
• Organized and able to track spending habits.
• Can control greed when it comes to getting rewards and benefits.
• Preferably have good existing credit.

The best advice that can be offered to someone new to or struggling with credit cards is to never carry a balance, ever! Second to that would be to never take out a cash advance or use the low interest cash advance cheques that they constantly mail you unless you know exactly what you are doing. The low interest rates are great, except that all your payments to the card get credited to the lowest interest rate charges first (i.e. your cash advance) even if other charges are older. That means you will always be paying the highest possible interest rate until your balance is 100% paid, including all charges and cash advances. New laws have come into effect in Canada during 2010 that help mitigate the cash advance problem, but it is still something to watch out for.

Continue on to our Credit Card Primer, skip right to The Best Credit Cards In Canada, or navigate to other areas of the Credit Cards section using the menu on the left.