Pop quiz! (I always hated those in school) But here we go.
Question 1: You are standing in line at a department store waiting to make a purchase. You pull out your wallet and look at your three options of payment. You have cash, a debit card, and a credit card. Which form of payment should you choose?
I can already say, without seeing any statistics, that the majority would choose cash. Why not, right? That is what we are taught. If you have cash, use it. Don’t let the banks or credit card companies get their greedy hands on it. Using cash is the American way!
The other probably chose, debit card. It is so convenient and the money comes right out of your bank account. What could go wrong? Well, a lot could go wrong. You know this if you are a consistent listener of Saving Thousands.
The unpopular answer is to use the credit card. For so long we have learned to only use credit cards for emergencies, or use it sparingly. But this mindset needs to change.
Robert Palmer explains why using credit cards is a must, and how you can take advantage of what they have to offer:
How You Can Take Advantage of Your Credit Cards
(Transcript of Audio)
The credit card is there. It’s like the old saying, Rob, guns don’t kill people. People kill people. And it’s kind of the same thing with credit cards. Credit cards are just a tool. Credit cards are the vehicle. And now if you misuse a credit card, it can get you in trouble very quickly.
The key is we’re not going to misuse our credit cards. We’re going to have the credit cards. We’re going to take advantage of them to the best of our ability and to the best uses for us. We’re going to rack up the points. And the cool thing is, no matter what you’re into, there seems to be a credit card that will reward you and help you with the things you want.
Taking Advantage of the Points
Some of the car companies now have a credit card. You can use the points toward a down payment on a vehicle.
I think GMC has one of these. You get the GMC card and the points you can use for a down payment and discounts on an actual vehicle. If you want that brand new truck, you could actually get money towards it by using the GM credit card. As long as we pay it off every month, on time, in full, there’s no interest.
If I can buy a vehicle cheaper by using a credit card and then paying it off in full, why would I not do that? If I go to the grocery store, and I have a choice between the cash in my pocket, which doesn’t get me anything. I have a debit card or check card because I don’t pay attention, I don’t listen to Robert, I didn’t cancel that thing.
With the debit card and the check card, you’re actually a huge risk of fraud. So we’ve got one of those in our wallet. Then the third choice is a credit card, the GMC credit card, where every dollar I put on it, I get a point toward being able to buy a new truck cheaper.
Or, maybe you’re not in need of a new vehicle. Maybe you’re a traveler. So every time I swipe that card I get points, which is going to move me toward being able to take that vacation I want. Or it’s going to move me toward buying Apple products. It’s amazing the economy that the credit cards have set up in order to let you cash in on your utilization.
The Trick is Exposed
Now, why do they do this? They do this to encourage you to spend. They do this to try to get you in trouble. We’re too smart for that. We know the tricks. If you know the tricks, they don’t work. That is Rule 5.
So we know the trick. The trick is, we’re going to give you these points because we want you to enjoy a nice new vehicle– wrong. You’re giving me the points because you want me to screw up and get in over my head. But we know the trick. And so guess what? We’re not going to do that. We’re not going to get in over our head. But why would we avoid?
Why Your Credit Card is the Right Option
Option A is the cash in my pocket, which doesn’t give me anything toward a vacation or anything toward a truck. Now the key is, when the cash in my pocket is gone, it’s gone. And there’s zero chance of me having to pay interest, if I use the cash in my pocket.
The other option is to use this credit card. If I swipe this credit card, and I get these points and then I immediately go home, or I immediately go to the bank, and I use the cash in my pocket to pay that credit card back off, right then and there, then nothing has changed. I haven’t paid any interest. I haven’t worsened my financial situation.
But, what I have done is I’ve taken advantage of the credit card company. I’ve taken their gift. I’ve taken their gimmick. I’ve taken their trick. And I’ve turned it back around on them, and I’m going to take advantage of it. You know what, credit card company, I am going to use your card like crazy. I am going to swipe it all over town, but only for purchases, I would’ve made with the cash in my pocket.
Then, I’m going to commit to going and paying that credit card off so I have no negative repercussions. I have no interest payments. I have no late fees. I have no penalty fees. I have no over limit fees. I have none of the things you’re trying to trap me with that make you money.
But guess what? I still get the points. I still get to roll into the Chevy dealership in six months and get a nice discount because I’ve racked up points. I get to take the wife on a nice cruise and use points to pay for it because I use the card at the counter and I’ve paid it off. So they’ve got nothing from me. They’ve got nothing from me. But I’ve still got the points, the cash back, the rewards, the truck, the whatever it is.
Who Picks Up The Tab?
A lot of people question they do that? How are they making any money if they’re not making money off your interest? The other way that the credit card companies make money– and a lot of good money– is they charge the merchant. Whenever you swipe that card, the person you’re buying from has to pay a fee.
If you’re at Publix and you use your credit card, Publix is going to pay a fee to the credit card company in order to facilitate that transaction. This is where they get their money on the front-end. They’ll probably break even on you, if you’re not letting them earn any interest. They’re not going to lose money on you. They’re too smart for that. But they’re going to probably break even on you.
Then chances are, the merchant has built that cost into their pricing. Because everybody’s using credit cards these days. Every now and then, you’ll see the gas station that’ll say, get a $0.03 discount if you pay with cash because they’re trying to avoid those credit card processing fees.
Usually, it’s just a demonstration, though, when they do that. People get real mad at that kind of thing.
Why Cash Isn’t Always the Best Option
I’m telling you what, I still see it every now and then. It just makes me laugh. We are so used to using check cards, debit cards, credit cards, whatever it is. It’s built into the cost. And so the person who’s paying cash is actually overpaying. Because they’re making extra profit for the company because they’re not having to pay those credit card fees.
But then they’re not getting the bonus. They’re not getting the points. They’re not getting the rewards. And you may think it’s insignificant, but it’s not. You can do some really cool stuff on credit card points.
And there’s an entire websites out there built to help people figure out how to maximize these. And if you want to go to Italy, here’s the best credit card to have and here’s how many points you’re going to need. If you want that new truck, here’s the right credit card to have. If you just want cash back, some of the cards out there will just straight up give you cash back at the end of the year. And you can use that for whatever you want.
This is a financial tool that I think we would be foolish to not take advantage of. So, again, getting back to where we started on this. So, if you don’t have any credit at all, you pay cash. It’s easy to pay cash for vehicles. You can just say, you know what, I’m not going to drive a new car. I’m going to go buy an older used vehicle I can pay cash for, for $5,000. I’m done.
Now, one thing I will tell you is, maintenance and other things on this vehicle are probably more expensive than a newer vehicle. I’m not saying a brand new vehicle. But a lot of times, people will buy a very cheap car in order to avoid borrowing money, in order to avoid having a car payment.
But then, they spend almost as much as the car payment would have been in maintenance every year. Because let’s face it, older vehicles require more maintenance. And so if you’re going to spend $3,000 a year in maintenance, you might as well just pony up the $250 car payment and gotten something a little newer that wasn’t going to have the same kind of maintenance strains.
Again, all of these things fitting together, the goal of this is to put yourself in the best possible financial position. The goal cannot be I don’t want to have credit. That can’t be the goal. The goal has to be, I’m going to put myself in the best possible financial position.
A lot of people think that the way to put themselves in the best possible financial position is to not have any credit. And that’s just not it. That’s not the way to do it. That’s not the way to set yourself up for success. And that’s what we’re talking about here. That’s what we’re here to help with.
So back to my example. You do have a couple credit cards. You use them responsibly. You’re going to use them so that you can get your vacation or your new vehicle. You’re using the credit cards. You’re paying them off. The credit card companies see a history of you paying on time. This is great. This is going to help your credit score.
And you went out and you bought a car. You didn’t buy a brand new car. You didn’t go above your means. But, you did get something maybe that had a little bit time left on the warranty. Something that was going to require a little less maintenance.
You have a car payment, but you don’t have all the ridiculous maintenance payments. And guess what, you also now have a trade line on your credit report that is positively reporting, that is helping you build your credit.
So this is another positive. So now this person, the person who chose Option 2– so Option 1, they pull the cash out of their pocket every time they make a purchase, don’t believe in credit. They think it’s the road to ruin– which it can be, but not if you’re responsible. And the funny thing is Rob, the same people who think that are the ones who are so responsible they would never let themselves get in trouble with credit, and they’re the very ones they won’t have it.
So Person A pulls the cash out of their pocket, doesn’t get the points, doesn’t build the credit score, doesn’t build up their credit, they just pay cash. Person B puts it on the credit card, gets the points, increases their credit score, and then immediately pays it off, so neither person is paying any interest.
In the next scenario, the Person 1 is paying cash for a car, but then they’re spending $3,000 a year in repairs. Person 2 has a $250 a month car payment, and they’re not spending $3,000 a year in repairs. So again, they’re dead even. But Person 2 is building credit and is actually going to have a nicer car that’s paid off when they’re done with making the payments on that car loan.