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Credit Cards: The Double-Edged Sword

by Chad Johnson on 7/22/2022

Countless times my clients will tell me that they never want to use a credit card again. My comment in return is always this: credit cards are a necessary evil; you can get overwhelmed with them but you cannot live in our society without them.

Why do you need credit cards?

Because you never know when you will need good credit worthiness and unfortunately credit worthiness is not something you can build over night; it is something that takes time and you have to use credit to build credit. There are many factors that go into determining your credit worthiness, but one important element involves your use, and access to, revolving credit. Factors such as how long you have had the card, what is the daily balance, have you ever been late on a payment, and what is the debt to available credit ratio; all factor into your credit worthiness.

The trick is how to get the most out of your credit cards without falling into the credit card companies’ trap.

Statistics show that it is best to maintain three credit cards.

It is important that you make the decision on what cards you choose carefully, because once you choose a particular card you want to try and keep it forever (remember length of time with a card improves your credit, therefore canceling or closing a card will decrease average time with your cards and lower your score). I recommend my clients take advantage of the sites out there that help you select the card that is right for you, such as, Nerd Wallet or Credit Karma. These are sites that allows you to compare the various credit card offers side-by-side.

What are the setup fees, the monthly and/or annual fees, and the interest rates? I usually recommend you choose low fees over low interest since your goal will be to keep the balance down as low as possible therefore paying little interest, the fees you must pay either way.

Once you choose your cards use them wisely.

Use them only for items you would pay cash for anyway, such as gas or groceries, and then pay them off just before the statement close date. I have one card, which my water bill is paid with automatically each month; I don’t every carry the card with me. This way it is used every month for something I would have to pay cash for anyway and I don’t have it with me as an option to use to rack up other debt with.

Here is the tricky part: never rationalize that you can charge now for an unnecessary item (such as a toy or gift) and just pay for it when you get paid. For those non-essential items you want to stick to your original proclamation: no more credit card debt and only cash from now on. I had one client tell me that when the holiday season arrives she shreds her cards; by the time the replacement cards arrive the holiday shopping period has passed.

The bottom line is you really cannot function in today’s society without credit cards; the trick is to remember credit cards can be a double-edged sword, so handle them with care.

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