The Mechanics of Money (Part 2): How I Use Credit Cards

This is Part 2 of a series on the nuts and bolts of how I manage my money. In this part, I discuss credit cards. Part 1 covered savings and checking is here

The proper use of credit cards.
The proper use of a credit card is to pay the bill in full every month. No exceptions. Without the ability to pay a bill in full every month, one should not use a credit card. That’s my view.

However, that is not always possible for many. So may I suggest that, if one has credit card balances, one go on a “money diet” to bring down expenses. Money diet means spend less so that one frees up cash to pay off the cards. Once the cards are paid off, keep them that way. There are many free resources about how to reduce expenses and pay off debt; use them.

High interest or lowest balance?
It is not hard to find differing opinions as to whether it is better to first payoff the credit card balances with highest interest or to payoff the smallest amount first. There is logic to both approaches. Paying off the smaller balance first gives a person a sense of possibility. Instead of thinking of the impossibility of paying off all bills, the elimination of one gives hope that total elimination is possible.

However, in thinking it through, I would suggest paying off the higher interest bills first, as the amount of labor and time to earn enough money to payoff high interest loans is so much greater, so paying them first reduces the amount of time (and money) that would have to go into paying them off later rather than sooner. (I am indebted to Tim McAleenan Jr. of The Conservative Income Investor for this concept, here. )

Some consider credit cards evil. There is a lot of truth to that idea. But in my view, they are not pure evil. (Don’t ask me what pure evil is.) Credit cards just are, they are a tool, just like a chain saw or a hammer. They can be useful, they can be helpful, they can be dangerous, they can be ruinous. It’s all in how they are used. Sometimes it is best to stay away from them. There was a time in my life they were destructive (translation: there was a time in my life when I hurt myself using them.). I got past that point. Nowadays I just use them. I respect them and their power, I just don’t misuse them.

Paying bills
As mentioned in Mechanics of Money Part 1, I aim to pay most as many bills as possible by credit card if there are no additional fees. Some utilities do not like being paid by credit card. If the bill I am paying charges a fee to pay by credit card, I don’t use the credit card. I pay using my checking account’s “bill pay” feature. My bank charges no fees to use bill pay.

Paying bills by credit card has some advantages. It gives me more time to pay. For example, if a utility bill is due on the 15th of the month and I set up payment to pay from a credit card on the 14th, I won’t need to pay the credit card bill until it is due, perhaps anywhere from one to four weeks later. Using a credit card, I can accumulate cash-back points or airline miles when paying the bills I already normally pay. [There is an ethical dilemma concerning credit cards I will cover in an upcoming post.] I pay fewer larger bills (the credit card bills) rather than many smaller bills (each utility). In addition, when using a credit card, my credit score shows I pay my bills on time whereas payment history with most utilities aren’t reported to credit bureaus.

Timing purchases
Sometimes it is advantageous to know more or less when the “statement closing date” for your credit card is. This is the last date of that bill cycle. This is often not the same as the bill due date. Namely, any charge after the statement closing date goes on the following month’s bill. Sometimes if I want to charge something, I wait until after the statement closing date to charge the item. The result is that the charge slides into the next month’s bill.

Beware of Danger
Timing purchases sounds like a nice idea, but it is dangerous in that miscalculating can erupt in unexpected consequences (translation: late charges if you are not careful). So if you decide to do some timing, be careful.

About paying credit card bills
Some, if not all, credit card companies allow you to pay the credit card bill by online transfer (withdrawal) from your checking account. This process is usually initiated from the credit card company’s web site to “pull” the money from your checking account, as opposed to a “push” from my bank. I found this feature to be very useful. No stamps or checks needed.

When setting up payment for paying the credit card bill itself, I time the payment (since you can arrange the payment date in advance) usually for the day before the bill is due. Be sure to read any small print from the credit card company to be sure a payment will be credited properly; namely, not late.

I have two credit cards, one is a cash back card, the other is an airline miles card. All bills are paid off in full every month. Mrs. SmileIfYouDare has several cards. We don’t use all of them in any one month. She has several because of various different perks each card has. Airline miles, cash back, discounts. She doesn’t mind the time to figure which to use when. I’m not that interested in paying attention to all those details, so that’s why I don’t have as many cards.

Credit card receipts
We save all credit card receipts. When the bills come in, we reconcile the bills with the receipts. It does not happen often, but once in a while we find an error: things were double charged, or an unknown charge showed up on the bill.

I have seen numerous friends not bothering to take credit card receipts from restaurants and other places. I keep my receipts because I want to be sure that when I get a bill, the bill is correct. No one will be as vigilant as I can about my money, so I keep a tight rein on it.

Suspicious charges
Sometimes a credit card company will find suspicious charges even before I get the bill. In such a case, they have called me and inquired about some charges. Not being aware of these charges, they canceled the card and sent me a new card with a new number.

One of the credit cards I use has a feature where you can set up to get an alert when the balance on the bill goes over an amount that you can set. I recommend using this feature if available. One day I got a message to that affect, I went online and saw a charge for over $2,000.00 in the previous 24 hours for some electronic equipment I did not order. So I immediately called the card company, they canceled that order and the card, and sent a replacement card with a new number.

While I would not normally have been liable for that charge nonetheless, it was good to handle this problem as quickly as possible.

Automated bills
There are a few bills that I have paid automatically using credit cards. These usually are a fixed amount each month or close to it.

I don’t automate paying the credit card bill itself. Automating it sounds like a good idea, but I want to not let checking the receipts against the bill slide. So I don’t automate it.

Keeping track
I found it helpful to keep a list of which bills I pay by credit card and which I will not. If and when a card needs to be replaced or changed (a new card with a new expiration date has arrived, or let’s say the card gets canceled and a new one issued with a new number), I have a ready-made list of which places I need to contact (via their websites) to change the card info. If I didn’t have such a list, I would need to go through all my bills and figure out each time which are paid how.

How is your credit card use?

Mechanics of Money Part 1 covered savings and checking here.

The Mechanics of Money Part 3 covers investing.

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