Personal finance is definitely a complex topic. In fact, financial answers are rarely  black and white. Everybody has their own opinion about how to manage one’s money and there is often more than one right answer. This is why I decided to create this Friend or Foe series. Over the upcoming weeks, I’ll take different financial tools and explain how it can be your friend or how it can be your foe.

Today, we start with one of the most debated financial innovations (or devil’s creation): The Credit Card: Friend or Foe?

Why your credit card is your worst enemy

All right, I’ll start with the easy stuff. It’s easy to hate credit cards and here are a few reasons why they can really be harmful to your personal financial health:

  • They charge exorbitant interest rates
  • They are too easy to use so you tend to charge them to the limit each month
  • They are vicious since they always increase your limit
  • 0% Apr balance transfer cards are just another trick to help you spend more money
  • They make your Microsoft Money bust as you go over your budget
  • Credit cards reward programs incent you to spend more
  • Credit card debt is an important source of dispute among most couples
  • Credit card issues can ruin your credit score and prevent you from buying the house you want
  • Credit cards are… evil!

But I think that credit cards are your friend!

Huh? Say what? I just spilled all my venom on credit cards and now I will tell you that this is one of the most amazing personal finance tools ever created? I must be crazy 😉

The problem is not the credit card, it is you!

Let’s be honest for a second. Stop reading, grab your car keys and jump in. Look at the speedometer. It probably says that the machine can go over 100 mph. Do you really drive at that speeds?

So if you sit back down in front of your computer, take your wallet out of your pocket and look at all your credit cards; do you really have to rack each of them up to their credit limits every month?

If you can control your credit cards, they can become your friend for many reasons:

  • It’s the easiest way to build a solid credit score as your actions are reported monthly. Pay it off completely each month and you will build a stellar credit report.
  • It’s also an easy way to gather rewards. I personally use my credit cards for all purchases. Therefore, I gather points on every bought. At the end of each month, I pay my credit card in full. I simply don’t have to avoid emotional purchases over the month and I have enough in my bank account to cover.
  • 0% APR balance transfer credit cards are also an easy way to get (temporarily) out of the mud. However, jumping from one credit card balance transfer to another is not a viable solution. Before you apply for a 0% Apr balance transfer credit card, make sure you have determined a plan to pay it off.
  • Credit cards allow you to use other people’s money to work for you for FREE.  I make all my regular monthly purchases the day after my statement is printed and have 6 weeks before the payment is due.  It is like an interest-free cash advance!
  • My credit card allows me to have additional insurance on all my purchases and coverage while traveling. This is how I save a lot of money on insurance and extended warranties!

In the end, I find that credit cards are more your friend than foe. However, it is a volatile friend that you need to be able to manage well in order to get along ;-).

Mike

Mike

Mike, aka The Dividend Guy, authors The Dividend Guy Blog since 2010 and manages portfolios at Dividend Stocks Rock. He is a passionate investor.