Credit Cards - How to Enslave Yourself in One Easy Step (Part 1 of 3)
Contrary to popular belief - I actually love credit cards!
This post is a little different it's Part 1 of a 3 part series on Credit Cards. This section is a story about how I learned the ins and outs of credit cards. If you just want the facts, skip to the bottom, otherwise enjoy and send it to someone you care about (they will thank you later).
Credit cards have become such an integral component to our every day lives, it's worth talking about at detail. While Part I is more personal and what I'm currently doing with Credit Cards, stay tuned for Part II "How to Get Out of Credit Card Debt" and Part III "Which Are The Best Credit Cards in 2018".
Learning credit cards at 8 years old
Like basically every other lesson on this website, I learned the ins and outs of credit cards from my parents - particularly from my mom. When I was between 8 and 14 years old my mom would take me to the mall almost every Saturday morning and we would shop all the sales. We wouldn't always buy something, and maybe that was a mini lesson in itself; we would only buy things when there were good deals, so when we did buy - we bought a lot.
Don't be blinded by the store lights
We went Saturday mornings because that's when all the best sales were, at the time the mall couldn't get enough people and having sales would help with that. I remember Hudson's Bay used to have this thing called "Scratch and Save" (maybe they still do, I don't know). The first 200 or so customers would get a scratch card valued at 10%-70% your entire purchase (so obviously there being two of us, we would each get a card and see who got a higher percent discount). For nostalgia, the card looked like this, and you would have to scratch it at the cashier:
I learned everything I know from my mom
After years of casually doing this, I started noticing my mom was slipping mini lessons into each outing - things like why we buy with credit cards, why buying things on sale was beneficial and that it's ok to leave the store if there isn't a deal. I can literally remember her saying to me "...now Benjamin, remember, only buy what you have the money for today". In reference, she was specifically talking about how to use credit cards.
I say credit cards (plural), because she had quite the selection - like an entire wallet full of credit cards. She's a credit card ninja, and knew what to use in every situation to get specific points to redeem for bonus bucks during a certain time of the year and at what particular store...
To this day I still don't fully understand how she does it. This was also well before smartphones and apps to keep track, she did it all old school - by memory. I don't even think she wrote it down or had a lookup chart to navigate the deals.
My mom bought everything on credit card, and she taught me why.
The world gives you two options when you buy something: you can buy it using your money or someone else's money. In the financial game of life it's usually better to buy it on someone else's money if it comes at no cost to you. And that's basically what a credit card is. The second part of that is really important "...if it comes at no cost to you", I'll touch on that in a second.
Credit card companies will advance you money to buy what you want, and you pay 30 days later. On top of this you get sweet perks for using particular cards. Now I'm not the credit card ninja like my mom was, I have 2 cards and I always go for the one that gives me the highest percent of cash-back. Because, free money.
Back to the second part of what my mom taught me, "...if it comes at no cost to you". Unfortunately most people use credit cards thinking they are using other people's money, which sounds great, but really it is coming at a GREAT cost to them.
Many fall into the trap of owing money back to the credit card companies (and at such high interest rates!). It happens because people buy things they can't afford today, but think they will be able to afford in 30 days. Maybe they have an incoming pay check, or bonus, or windfall of money over that time.
As hard as I try, I cannot get my mom's voice out of my head when she said "...now Benjamin, remember, only buy what you have the money for today."
It may sound silly, but it's critical advice. I got my first credit card after high school and put all these lessons into practice. I can attest that this sage advice has helped me avoid interest payments since then (with a hiccup here and there - talk about that later). I really enjoy taking all the benefits the cards bring (cash back, air miles, bonus bucks, etc...) and skipping the interest payments.
It all boils down to one important lesson I learned, which is:
Use your credit card like a debit card.
It takes a little bit of discipline, but is absolutely worth it.
So how do you manage to pay off your credit card every single time?
I set it up so it happens automatically. I'll get to strategies in a second, first let's talk about how serious credit card debt really is.
Credit card debt
The common concern with credit cards are the unusually high interest rates. Unfortunately, most people don't realize just how much the typical interest is on a credit card statement. It's usually around 20%, which is SUPER high. (like stupid crazy high)
Try this out:
Here’s an eye opening activity that I think we should all do at least once - go get your last credit card statement, and take a look at the minimum payment amount, it’s usually around $10-$100 depending on how big your bill is. Now take a look at the last page of your statement in the tiny font that say if you only pay the minimum amount how long it will actually take to pay off this bill (warning, you may need a magnifying glass to read the fine print)
I just checked mine, this is from a credit card bill back in 2013 with an unusually high balance of $4,852.63 - so must have been a fun month! See how the minimum payment is $10?
I've zoomed into the fine print and blown it up. Give it a read.
The fine print:
Shocking - but I would still be paying off this one bill even in 2051! (38 years later).
Most people genuinely don't realize how long they will be paying credit cards off. Depending on the size of your bill, it won’t be weeks or months - it will be YEARS, and most likely, years on years on years… and that is if you stop using your card immediately.
So this is the trap.
This is the trap, and it buries so many families in debt. Once you fall into it, it gets harder every bill to dig yourself out. I say "dig" yourself out, because essentially you are digging deeper every bill you accumulate.
Don’t fall into the trap, pay your bill in full every time. If you don’t have the money, then I suggest you borrow, steal or whatever you have to, to pay off the bill in full (ok, but don’t actually steal).
I would recommend reducing your spending and going into 'emergency' mode with your money until you can completely eliminate all your credit card debt (that includes no more eating out, partying, shopping or anything). No more giving gifts, or presents, your friends and family will understand - if they truly love and care about you, they wouldn't want you to carry credit card debt just to give them a gift.
Because the interest rate is so high, getting out of credit card debt should be priority number one. Nothing else financially matters. I wouldn't build savings, or invest your money if you're paying interest on your credit card bill. The math just doesn't make sense in your favour. Pay off your credit cards ASAP.
Masters of money use credit for all the great benefits and they avoid all the downsides by paying their credit card bills in full every time. If they can’t do that, then they have no business having a credit card in the first place.
How to Pay your Credit Cards
All those Saturday mornings shopping and learning about credit cards taught me 3 absolute rules, which I think are the cost of entry to using credit cards - I want to share those with you now.
The 3 Credit Card Rules:
Treat your credit card like a debit card (only buy if you have the money today)
Pay your credit card bills in full, every time - if you can't, then go back to Rule 1
Check every statement and make sure what you're being charged for is accurate
People are ultimately in charge of their own finances, the buck stops here - with you.
I was taught that there were never any excuses or exceptions to those 3 rules.
Why I Automate My Payments
If paying off your bill in full is of high priority to you and due to the high interest rates, it should be, then make it automatic every month to guarantee it. All my credit card bills are set to automatically debit from my main account on the payment date.
I Didn't Always Do This
I’m embarrassed to admit, but a couple times in my life I’ve not only paid less than the full balance, I paid $0 on the due date - I completely forgot! I was traveling, or camping, or at a cottage and it completely slipped my mind. I had realized a few days later and made sure to pay it off in full (including the few days of interest that had accumulated between payment date and when I realized).
Since then I've amended my process, I’ve made the payment automatic to avoid it from ever happening again. Believe me, growing up in my household with lessons like I talked about before, and then missing a bill payment completely... I thought the world was ending.
But it didn't, and now it won't happen again.
I believe in you!
You Can Still Be Financially Responsible
No matter what stage someone is at (in debt, paying off debt, out of debt), all these rules still apply. So avoid one of the biggest money traps in our society today, and pay your credit cards. Depending on what stage someone is in, they should focus on their spending habits, for instance, someone currently with credit card debt should re-think purchases - are they necessary or just a habit I can do without (for a while, until financial stability is restored).
Stay tuned for the next part of the series Part II "How to Get out of Credit Card Debt"
and Part III "Which Are The Best Credit Cards in 2018".
Send this to a loved one so they can stay safe and keep their financials healthy. They’ll thank you for it someday.