How to use Credit Cards Responsibly

DO NOT TAKE OUR A CREDIT CARD IF YOU DON’T KNOW HOW TO USE CREDIT CARDS RESPONSIBLY. This should be the warning placed on every credit card application form and also there should be a competency test on how to use credit cards but we live in a capitalist world so the only thing left is to educate yourself on money management. I have 2 credit cards at the moment and in my lifestyle I have had 8 in total (includes the current 2) and in the past I did not know how to use credit cards responsibly. Educating yourself on how credit card companies many their money back, how you can ensure they never make money off you and how to make it work for you is the first step.

Before we jump into educating ourselves on responsible use of credit cards, let’s get one thing out of the way. Are credit cards inherently bad? The simple answer is, NO – credit cards are financial tools and just like any financial tool, you can use it for your benefit and if not used correctly then it can work against you. One of the biggest money myths out there is credit cards are bad when actually all we need is an education on how use credit cards responsibly. Financial literacy is a big part of personal finance management because if you understand the basic concepts of money management then you are half way there. The next step is to understand how to make each financial tool can serve you best and that is the aim of this post

*Disclaimer – I am not a financial advisor, please contact a qualified financial advisor for your specific needs.

How to use Credit Cards Responsibly

When I was 18-years old, I got offered my first credit card and I was so happy, why? because the credit card advertised it as free money and you didn’t need to pay anything back for the next 3-months. As an 18yo with next to zero money literacy this sounded like a dream come true and boy did I go on a spending binge or what. At first, I was fearful because I firstly didn’t have a job, I was still in school and didn’t understand how this ‘free money’ situation worked. But then I got a taste of it and funny enough I spent on something that I had to because I had no available funds but when my first statement came, of the £300 I spent, I needed to only repay £15 back to the credit card company, I didn’t look at the interest box at all.

So, the first lesson in how to use credit card responsibly comes in the form of, ‘how do credit card companies make money‘. I want to make this clear, credit card companies don’t lend you that money out of the goodness of their combined hearts but rather, they are hoping one of these days you will fall on hard times, use their card and only pay back the minimum required payment and once you do, they will be happy to apply the interest on the balance you owe. If you have a credit card limit of £1000, you use £700 and they inform you the minimum is £25, what they don’t tell you is this £25 will consist of principal and interest charge and in 90% of the time the interest is something like £13.45. This means, you have repaid only £11.55 towards your balance of £700 and not £25 and that is how credit card companies make their money.

The second lesson in how to use credit card responsibly is ‘how to ensure the credit card companies don’t make money off you‘. Firstly let’s start with a disclaimer, if your credit card comes with annual fees then they will always make money off you but you can always balance it out if its a cash back credit card or card that saves you money. So, how do you ensure that the credit card companies don’t make money off you? Well, the easiest way I have found is to only spend what you are confident you can pay off before the next statement (not the end of the month). People often think it would be find if they paid off the balance before the end of the month and wondered why they were still charged interest, this is because your ‘cut off date’ night not be the end of the month but another day. Personally I have two credit cards with different cut off date, for the AMEX, I make payments before 19th of each month and for the Lloyds I pay off the balance before the 9th of each month.

The third lesson in how to use credit card responsibly is ‘how to make credit cards work for you‘ at least how I make the credit cards work for me. First thing to understand is my statement above, ‘only spend what you are confident you can payback before your next statement date’. This is because there are times when you know you will have money (e.g. from salary) in a few weeks time but need to spend now and can not wait until you get paid. If you can spend within your statement window then I think it is ok to spend then but if it outside your statement window then use your emergency fund or other savings that you can replace soon after you receive the money. One thing I must reiterate is putting yourself in debt because of FOMO (fear of missing out) is not smart, because you really want that dress, those shoes or that trip is not worth going into debt.

I only use credit cards that I can earn something back from, my AMEX I earn AVIOS points from everyday and these AVIOS points can lead to me getting a free flight, free hotel room or free experience and more recently I can convert into nectar points and I utilise at my local supermarket. For my Lloyds cash back credit card, I use it to earn money back on everyday spending and this money I can use to purchase other things in the future.

I personally do not believe credit cards are bad, I think people lack the education on how to best utilise credit cards so you don’t see them as evil but rather as a tool you can use to your advantage.