One of the biggest things that anti-credit proponents like to hold up is that using credit is more expensive. But is it really?

Credit Can Be More Expensive:

If you take out a loan or carry a balance on your credit cards then yes, credit is more expensive. You will be charged interest on your purchases. If you use credit this way, then you will always end up paying more for whatever the item is that you purchased – whether it’s a house, a car, or a sweater.

Using Credit Wisely Can Save You Money:

Purchasing things on credit does not have to be more expensive. It all depends on how you use your credit cards. If you can discipline yourself to pay your balance off in full each month then using credit can actually save you money – a lot of money. Using your good credit score to help you leverage your debt can also save you money.

The Easiest Ways To Save Money By Using Credit:

1. Combine Store Sales With A Cash Back Credit Card - My favorite method for this works especially well when you shop online. You can first go through a program that gives you cash back – something like UPromise, or Mr. Rebates. Then you visit their affiliate partners (Upromise has hundreds – many are stores that I regularly shop at anyway) and buy what you need on clearance. You then pay for your purchase with a cash back credit card.

   When it’s all said and done, you get a discount from the store (Usually 20-75% when I shop) you get several dollars back in cash from your rebate program, and you get 1-2% or more back in cash from your credit card.

   It may not seem like an enormous amount, but over a year’s time it really adds up and it takes very little effort once it becomes a habit.

   Even when I’m not shopping online, carrying a cash back credit card and using it for regular purchases is like getting a small perpetual discount on everything that I buy. As long as I pay my balance in full, I do not get charged interest, and I get to keep the discount.

2. Keep Up Your Credit Score - Never charging more than I can afford to pay back in a given month keeps my credit score healthy. I show a strong record of responsible credit use, and regular payments. That means that when I do have to take out a loan that charges me interest (like a home loan, or a personal loan) I will always pay less in interest than someone who regularly carries a balance on their credit cards, or makes their payments late.

   This is one tactic that people who do not understand credit get burned on. If you never use your credit cards, and you never make payments because you haven’t charged, then you end up paying hundreds or thousands of dollars more over the life of any loan that you take on.

   An even further negative repercussion to not using credit is that with the economy the way it is, you may not be able to get a loan at all if you don’t have an established credit history.

3. Leverage Your Debt - We discussed the pros and cons of using credit to leverage your debt little bit on Saturday. Long story short – If you use your credit responsibly, and you find yourself in the position of having to pay interest on something, then you have a wide variety of options that most people do not have. You can refinance any time it meets your needs, balance transfer your balances to new accounts with better terms, and generally never pay more than the lowest interest rates available at the time.

So, how do you go about using credit cards correctly? What if you are already in debt and want to take advantage of these benefits? The best, and easiest thing to do is to give yourself a quick financial checkup. Start by checking your credit score. It is not free to check your score, but it is a worthwhile investment if you are thinking of opening up a new credit account, balance transferring, or leveraging your debt in any way.

If your credit score isn’t approaching, or well over 700, you are going to have a hard time taking advantage of credit’s greatest benefits. If it’s over 700, then you’re in a great position to compare credit card offers.

If Your Credit Score Is Below 700:

These simple steps will raise your credit score. If you make them your habit, you will never have to worry about your credit score again. It will go up each month, and continue to go up throughout your life.

1. Do not carry a balance on your credit cards – If you are carrying a balance on any credit card that you own, stop charging until you get that balance paid off. If you are paying down the balance on one card while earning rewards with a different credit card – ok – just make sure that paying off the revolving balance takes first priority. Doing that will save you the most money in the long run. You aren’t really earning rewards if you get 1 or 2% back and you’re being charged 10% in interest each month.
2. Pay Your Bills On Time, Every Time - Set up an auto-draft if you need to, or mark it on a calendar, but don’t be late. Making your credit card payments late drops your credit score and you get eaten alive in fees (and then you get charged interest on those fees the next month).
3. Remove Yourself As An Authorized User - If anyone else’s credit accounts are showing up on your credit report, it is probably in your best interest to remove yourself as an authorized user. Unless you have complete control over the way that the other person uses their credit and pays their bills, then you could be setting yourself up for failure. If you are an authorized user on someone’s account, and they make bad credit decisions, it will effect your credit score too. It’s something that you will want to avoid unless you have an extremely low credit score and need the help (along with the risk).
4. Check Your Credit Report and Challenge Bad Information - Every negative item that you can have removed of of your credit report will raise your score. Just be sure that you don’t challenge too may items at once, or your credit score will be temporarily frozen until the challenges are resolved. For instructions on how to do this, check out our article: How to Dispute An Item On Your Credit Report

Do You Use Reward Credit Cards? What’s Your Favorite Card? Tell us about it in the comments, and we’ll respond!

Grab Our Free RSS Feed and Keep Reading:

• Want to discuss your reward credit cards with other readers? Visit our forums.
• How to Raise Your Credit Score In 7 Easy Steps
• The FICO® Score Breakdown

This entry was posted on Monday, January 5th, 2009 at 13:15 and is filed under Reader's FAQ. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.