|by Jason Steele|
It has been said (by me), that credit cards are like fire, they can be powerful tools or an incredible danger, depending how they are used. My specialty, reward cards, is a very powerful tool, but there is a bigger picture out there that needs to be addressed.
Credit Cards Are Just One Aspect Of Your Financial Lifestyle
Attempting to gain rewards from your credit cards is really part of a larger philosophy of personal finance that allows me to hunt for rewards in my spare time. I am lucky that I have been brought up to practice several healthy fundamental financial strategies. I would like to share these with you, not because I think I am perfect, but in the hope that it will provoke some thought and discussion on your personal finance practices, and how to improve them.
Rule One: Never Charge Anything To A Credit Card That You Cannot Pay For Now
This would seem to be the opposite of “credit”. I was brought up to treat all credit cards more like charge cards, like the original American Express card. My first credit card in my wallet was in my parents name, and I was only to use it on their permission. If I wanted to purchase something for myself out of my allowance or savings, I had to reimburse my parents when the bill was due. Paying the minimum balance was not an option. As I grew older, and was earning money for myself, I kept this practice. To this day, credit cards are merely a method of payment for me, not a loan.
Rule Two: Only Borrow Money For Appreciating Assets
Would it surprise you to know that I am currently hundreds of thousands of dollars in debt? That is what my mortgage statement on my house tells me each month Obviously, credit is a valuable tool, but only when it is leveraged in your favor. While the recent housing crisis has shown that real estate does not always increase in value, I would have to argue that this phenomenon is the exception that proves the rule. Owning an appreciating property, especially as your primary residence, is one of the few reasons to borrow money and pay interest. When your house is your primary residence, you get a generous tax advantage that ensures this is a great investment. The only other time I have ever borrowed money was for education. A degree is another appreciating asset, and school loans often come with heavily subsidized interest rates and payment terms.
The Implication Of Rule Two: No Car Loans
I once heard Bill Clinton remark that his mother was so frugal, that she would only used cars that she could pay for in cash. That remarked surprised me as I do not consider myself to be especially frugal, yet most people are stunned to find out that I do not have a car payment.
Taking out a car loan would be a gross violation of Rule Two. Everybody knows that a new car depreciates dramatically the moment it is driven of the lot. With the exception of a few rare classics, all cars loose value every day. Borrowing money to pay for a car is just not making your money work for you. When you purchase the car, you are paying a fixed monthly rate on it. As time goes by, the car will be worth a fraction of what it was when you bought it, yet your payment stays the same.
Almost all of us still require a car to get around, and the answer is similar to Rule One, always a car you can pay for immediately. If you are ing your first car, choose an older, used car. If you are currently in a car loan, pay it off and continue driving the car until you have saved up enough to upgrade it. While my first few cars were used, they were low mileage when I bought them, and very reliable. Ultimately, I was able to afford a new car in 2002, yet last year, I sold it and bought a used 2005 version of the same car. I applaud Jenna for her decision to choose used car over a new car, and to pay cash instead of taking a loan.
More Rules Tomorrow
I know this is a lot of info. I swear I am not trying to be preachy, or hold myself up as a perfect example. I frequently mention that reward cards are only for people who pay off their balances in full, and I honestly hope that some of these suggestions will help bring more people into this category. By doing so, you will also become more financially secure, which is a far greater reward than mere frequent flier miles.