My dad and I enjoy discussing politics with each other. We also openly discuss finances. These areas collide often because my dad like’s to recall a story about some politician who was being audited or vetted or something else to do with his finances.
This politician had like $30,000 worth of credit card debt when the person doing the auditing did the investigation. Most people who heard about this started booing the politician. Then the politician stood up (I’m dramatizing, this was all interviews and typical “he said she said” type reporting) and said, “Look more closely at my credit card bills and income! I pay that damn thing OFF every month. We just rack up the debt because we get airline miles.”
(Or cash back, or whatever the offer was at the time.)
This has always stuck with me, of course. I mean, credit card companies are ALWAYS going on about the many perks they offer. Airline miles! 1%, 2%, 3% cash back! Free food! All these gimmicks to get you to use their card.
But debt is bad, right?
WRONG! There is GOOD debt and there is BAD debt.
Good debt is used to buy things today that you can pay off ONLY if you save up for years and years and years. 30 years in the case of a house (15 if you’re that type). 5 years for a car. You know: the stuff that you can either put that payment in the bank every month until you have enough to pay it off “debt free” (whilst living in a rental place paying DOUBLE the mortgage payment, thus paying essentially 3 months for every 1 out of your paycheck).
If you can afford a $150,000 home after saving for 30 years, guess what? You can afford a $150,000 house TODAY. Congratulations! Save a ton of money, too!
Anyway. That’s GOOD debt.
BAD debt is the stuff that you could never afford even if you saved your money for your entire life. The super expensive home. The credit card bill that you can never pay off. Using a credit card to fund your new business because you’d heard that you should never invest your own money (I heard this one on The 700 Club once and I very nearly threw my shoe at the TV).
Of course, in the case of that credit card, it might be the only thing keeping you with a roof over your head. And the expensive home, well, banks are supposed to prevent that sort of thing, but they didn’t in 2008…As for the business investment, honey, a credit card IS your own money–only you (and your spouse/cosigner) are responsible for paying that money back. I’m more upset that The 700 Club just went on to demonize all credit card debt instead of explaining that this was an idiotic idea to start with! Yes, if possible, you should always get outside investors to put up the money for your new business idea because this way you’ve done half the work to ensure that your idea has a MARKET. People can be very shortsighted when thinking that their idea is the boom-diggity.
Anywho, there are lots of folks who say that all credit cards are evil. That they’re a slippery slope to the poor house. While I suggest doing everything in your power to avoid using your credit card as a life preserver, sometimes shit happens and it’s better to have it available than to be completely destitute.
Okay. Back on positive notes! There are two (in general) types of credit cards. Those with a low interest rate that don’t offer any kinds of rewards and those with a high interest rate that pay you to use them. Hehe.
Okay–you need one “emergency card”–this has a low interest rate (ideally under 10% APR) that you can probably get from your primary bank. A line of credit may also work because it’s a low interest way to put money directly into your bank account (if I’ve correctly watched my dad do this–I don’t have one, so I’m not sure exactly how it works). All that matters is that you have your life preserver available for when an emergency happens. This is for all purchases that you know you won’t be able to pay off within 1 month of obtaining it. This is for everything you don’t mind paying interest on–you know: EMERGENCIES!
Now, you need at least one (more can be fine–I have 3 currently) REWARDS CARD!!! Seriously peeps, get excited about these! Now, these things have a ridiculously high interest rate (25-33% APR), BUT, you never have to pay a single penny of interest, IF you pay that sucker off every month (I pay mine off every 2 weeks when I get my paycheck).
MAKE SURE THAT THERE IS NO ANNUAL FEE! A high interest rate can be circumvented by paying it off before any interest is incurred, but a fee can be tricky to avoid. You might have to spend so much during a given year or jump through some other kind of hoop. I don’t know, so I wouldn’t even worry about it. The goal here is to be paid to use a card, so do not spend any of your money upfront in the hope of getting more back than you paid in–it’s not worth getting burned.
My rewards cards are as follows:
Amazon (though Chase) where I earn 3% on Amazon purchases, 2% at gas stations/restaurants/pharmacies and 1% everywhere else. This is my primary card and I make about $5/month that I can use on Amazon, use towards paying my bill, or be put directly into my checking account. I use this card whenever I would otherwise use my bank card. These are everyday purchases (NOT EMERGENCIES) like eating out, groceries, fun stuff. These are purchases that are part of my regular budget and before getting a credit card, were just regular checking account expenses. I’m making $5/month to do my regular shopping and not paying a penny of interest.
My second card is via State Farm. This is our car insurance company which happens to be a bank as well. I got this card because my husband wanted to have a card in his pocket to help him build up his atrocious credit score. He’s never had a credit card before. This one came at 0% interest for it’s first year, which was very handy because we needed to buy new exterior doors and were able to put this expense on this card to get a bit longer to pay. It also gives us 3% points back when it’s used to pay for car insurance (we’ve set up my husband’s insurance to automatically debit this way (monthly) and I pay my insurance every 6 months this way) as well as 1% on all other purchases. He uses this card sporadically, but tells me when he does and tries to give me the cash to cover his expenses. We’ve only just starting to use this card to benefit from the rewards (the original plan was for him to put about $30/per month on it to keep it active and for his credit score to note some on-time payments), but now that we’ve decided to put our insurance payments on it, then immediately pay that off from my bank (I LOVE free online bill pay!), we’ll be able to earn points fairly quickly now. These points can go towards our bill or we can get gift cards. In the year we haven’t really been using it, we’ve got enough points for a $25 gift card. Not bad for money we would still have spent even if we weren’t getting paid for it!
Do not be afraid to get a credit card just for the 0% interest introductory rate! Use it, enjoy it, but MAKE SURE YOU PAY OFF THE BALANCE BEFORE THE 0% WEARS OFF! Our method is to make sure we have the money in the bank before we make this big purchase and use that money to pay off the card. Otherwise, it’s an “emergency” and it may need to go on the “emergency card”, depending on the rest of your finances. You do not want to put a big emergency purchase on a 0% interest card if you’ll ultimately have the expense for more than the introductory period, though you may have the option to transfer the balance to your emergency card, but I’m not sure of these rules. Luckily we’ve never had to deal with an emergency situation, yet.
My 3rd card exists SOLELY for the 0% interest for 2 years. We used it to purchase our new couch (got the card through the furniture store). We had all the money for the couch saved already, but getting the card let us get another account to improve my credit score and let us keep our savings flexible for 2 years. But, I’m always cautious when it comes to debt and don’t trust minimum payment figures, so we’ll actually have the couch paid off by about the year and a half mark. Once this card is paid off, I’m debating whether to close the account since I have no expectation to use it ever again.
My credit score suffers from two problems: my accounts are too young and I don’t have enough of them. Our goal is to buy a house, but we’re not exactly in a hurry to do so. I will start losing closed accounts (2 student loans that were closed soon after opening them because the banks like to buy and sell such things to each other) in a few years, so I may decide to leave the couch card active, but not use it, just so it continues to exist on my credit report longer (closed accounts disappear after 10 years, open accounts exist indefinitely). I’ll need to discuss things with the bank before making the decision one way or the other. I do not want to get hit with a higher home mortgage rate just because I don’t have 15 credit cards and a car payment…I guess I’m lucky that my student loans are all considered separate loans even though they’re consolidated into one payment with one company.
By the way, I shall end this with remarks on student loans. Mine are all through the Department of Education, some subsidized some un-subsidized. But, overall, my entire student loan debt was capped at just under $20,000 for 4 years of school, meaning that the school/Department of Education had to find a way to pay for the rest of my education. I realize that I’m incredibly lucky in this way.
For those who are considering student loan debt, my words of advice are to know exactly what you are getting an education for and to take just the amount of debt that you are confident that your future plans can sustain. For instance: I had no idea what to do in college. I as going because it was expected of me ever since elementary school. I spent 2 years bouncing between majors and ideas before finally settling on history and environmental science because I want to be an elementary teacher. Then I got rejected from the Ed school. I still have my double majors, but I graduated with few marketable skills and no idea what I wanted to do with my life.
But, I do not regret a moment I spent in college. I consider it the best 4 years of my life because that’s where I really grew into an adult. As it is, $20,000 in student loans is a hell of a lot cheaper than the therapy I’d otherwise have needed when I hit middle age! But, had I paid the $80,000 (in-state) that is the actual going rate of 4 years of education at UVA…well, therapy would have been the cheaper option.
I am currently contemplating going for that Education degree (though ODU, online) and will soon be filling out that FAFSA again. Since I am very confident about my major and what I will be able to do as soon as I graduate, I am comfortable taking on another student loan (or 2 or more because apparently that’s how they get billed through the Dept. of Ed.), but I will ONLY take on these debts if they come from the Dept. of Ed. and are of a reasonable amount. It’s a lot like I was saying about not using credit cards to fund your new business–by going to the Dept. of Ed. to get your loans, you have someone looking at your goals and saying that they want to invest in you. When you go to a private student loan company, you’re dealing with someone who only cares about getting their money back. There are a lot of unscrupulous lenders who can make an awful lot of money by screwing over their customers and I don’t want you to find yourself in this situation.