Open up a credit card. Let me explain!
Big expenses can be crushing to the average family. Of course it would be great to have a large stash of money to get you through whenever you needed it. The reality is that most families do not have a large emergency fund, if at all. I would certainly encourage you to always have an emergency fund and work to set aside at least 3 months of expenses and up to a year of expenses.
I know, I know, Dave Ramsey would probably yell at you if this thought even crossed your mind. However, I am in the business of not only helping you achieve financial independence, but to also learn the game of money and wealth transfer. There is a reason that credit cards exist and you need to learn how to be on the right side of the equation.
Sign up bonus (money or points)
If a large expense comes up or you think it will come up, you can sign up for a credit card that provides you with a bonus for spending “x” amount of dollars in “x” amount of months. For example, I had some plumbing issues at my rental property. I had a plumber come out to snake my sewer drain. He discovered some issues that I need to address, not surprising when you own a building built in 1913. The work that needed to be down will cost about $10,500 (yay sewer work is the best). I am currently waiting for my new Chase Business card to come in the mail. At the time of writing, the sign up bonus is $750 if I spend $6,000 in the first 3 months. Here is the trick. DO NOT sign up for a card and then spend money you would not have spent anyways. I knew I was going to have to spend more than $6,000 so I will definitely get the bonus. On top of that, a $750 bonus on $6,000 is a 12.5% return which is more than the stock market returns. You can also think of it as that $6,000 of work/stuff only costs you $5,250. Yes, they might charge a credit card fee of around 2-3% so your return might only be 9.5%-10.5% but that is still better than the stock market average return and you (hopefully) were going to spend that money anyways. You can also usually pay the rest of the work in cash or check to avoid the credit card fee.
Zero Interest
You can also usually find a card that has a 0% interest rate for 12 months, maybe 18 months. Again, most people would say do not buy anything you cannot afford. I partially agree with this. First, some things you have to do regardless. If you live in an area with no public transportation and your car breaks down, you need it fixed. You won’t receive your credit card right away but most banks still allow you to use your card right away. You can often add the card to your apple wallet or google pay account before you receive the physical card (call the bank before you apply for the card if you need to do this). One of the benefits of 0% interest is very apparent right now when inflation is high. With 5% or more annual inflation, money next year is worth less than it is right now. So, if you buy something right now but pay for it slowly and finish paying next year, you are actually saving money. Here is an extreme example. Inflation in Venezuela is very volatile but it has been recently around 200%. What this means is that an item that costs $1,000 today will cost $3,000 next year. So if you bought something with a 0% interest card, you get something worth $1,000 today but you can pay maybe $45 a month and then pay the balance in a year before the special ends and even though the item a year from now costs $3,000 you paid much less for it.
Fraud Protection
This is sometimes a forgotten benefit of credit cards. Credit cards do not take money directly from your bank account like a debit card does. Credit cards are essentially loans from the bank. If there is fraud on your credit card, the bank deals with re-issuing a new card and making sure you do not have to pay the fraudulent amount. You always want a written and signed agreement when working with a contractor but you also never want to pay with cash. Where’s the proof of payment? What is stopping them from just walking away with the money? A credit card is more secure. Even a debit card can allow someone to clean out your bank account and cause a huge headache for you.
Personalized (don’t just blindly follow my advice)
Anytime you see advice, you should always question whether that advice applies to your situation. Some people love tiny homes, some people love RVs, some people want a modest home, and some people want McMansions among many other things. I have laid out a few benefits of using a credit card. Should everyone open a credit card? Probably not. If you currently have credit cards that you cannot pay or only pay the minimum, I would not suggest opening another credit card. If you don’t have any money in a savings account or emergency fund, I probably would not open a credit card. There are certainly things that you should have in order before you take advantage of what credit cards have to offer because you don’t want to find yourself on the other side of the equation.
The Other Side of the Equation (oh no!)
The other side of the credit card equation is the reason that banks have credit cards. They want to make money off of you! They want you to pay 20% or more in interest. They want you to make the minimum payment so that you pay them more and more. They take a portion of the money they make off of you and they offer those sign-up bonuses and 0% interest offers hoping that people open more cards and get stuck in more debt. You can play the game if you know the rules and can abide by them. You want to make sure that you do pay your credit card in full every month. If you are using the 0% interest option, make sure you read the fine print. Some cards require that you make the minimum payment every month and then pay the full amount before the 12 months (or whatever term) is up. Others don’t require you to make any payments. Knowing the rules can save you big time and help you reap the benefits of being financially savvy. I earn over $2,000 per year, often times more, in credit card bonuses and rewards. This is almost two weeks of my W2 income pay just for spending what I would already be spending and being smart about my relationship with credit cards. If you blindly follow advice like Dave Ramsey, you will never own a credit card and you will be missing out on many potential benefits.
Your Strategy May Change Over Time
When I first began utilizing credit cards for the purpose of sign up bonuses and rewards, I was a little over ambitious. I never went into credit card debt, but I was following advice blindly. I opened cards, got the sign-up bonuses, but then kept the cards open and was sometimes paying an annual fee when I was no longer even using the card. When you open a new card, make sure you have an exit plan. I now only have one card with annual fees and I use it regularly. It pays me great benefits (my Costco credit card). My cards with annual fees have either been closed by me or I have requested them to be downgraded to a no annual fee version of the card, often times with less benefits, but who cares if I am no longer using it.
If you have any questions, comments, concerns or complaints, please feel free to comment, send me a message on the “Contact Me” page, or if you think you may be interested in working with me as your financial coach, please feel free to schedule a free, no obligation 20 minute consultation.