Years ago, I took a road trip with one of my sorority sisters. During the four hour drive, we discussed everything from our mutual disdain for living in the Midwest, to relationships and which frat guys to avoid at all costs.
Around the three hour mark, the conversation veered towards money as my soror mentioned needing to pay her credit card bill for the month. I had recently paid off all of my credit card debt and was knee deep in attempt eleventy-five (aka “it was far from my first time”) of Dave Ramsey’s Financial Peace University, so of course, I just had to let her know that credit cards are the devil.
“I don’t even use credit cards. I operate strictly off cash and avoid interest,” I proudly announced.
“Oh, I don’t pay interest,” she informed me. “I pay off my balance every month.”
Knowing that I earned more money than she did and that I had never been able to pay off a credit card in full at the end of a billing cycle, only one thought came to mind.
Weren’t credit cards the way to pay for the things that you didn’t have enough funds to cover? Where was she finding magical money to pay off an entire credit card bill?
“How can you afford to pay off your card every month?” I asked.
“I only charge what I know I can pay off at the end of the month,” she responded.
By this point, I was thinking she must be clairvoyant in order to foresee what her charges would be in a month.
“But how do you know what that’s even going to be ahead of time?” I wondered.
“Umm, because I use my card to pay for what I’d normally spend money on so I already know I can afford it and pay it off during that billing cycle,” she explained.
She also threw in the fact that her checking account earned more interest since cash was allowed to sit tight for 30 days before she used it.
While her approach made sense in theory, I still thought it impractical. I was convinced that credit cards offered too much temptation to overspend. Never one to forfeit the last word, I insisted that earning an extra thirty days of interest was not worth the one-way ticket to debtors prison that credit cards bring.
A Change of Heart
Fast forward to 2018 and I have calendar reminders for the 3rd and 22nd of every month to remember to transfer money from sinking funds into my primary checking account to pay my monthly credit card bills.
How did I get from preaching “credit cards pave the way to hell” to copping two of those bad boys?
Credit card rewards points.
Let me be more specific: BONUS rewards points.
100,000 of them. Thanks to a sorority group chat, the Chase Sapphire Reserve card was brought to my attention. At the time Chase was offering a 100,000 point sign up bonus after spending $4,000 in the first three months*. These points could be redeemed for travel at 1.5X their value or transferred to directly into airline miles and hotel points. The 3X earn rate on travel and dining was pretty sweet too.
Although I had recently recommitted to a credit-free life for the umpteenth time, the ability to travel to far off places for nearly free was just too much for me to resist. They say the definition of insanity is doing the same thing over and over again and expecting a different result. However, after many failed attempts I finally learned how my sorority sister managed to only charge what she could pay off each month, effectively using a credit card the same as cash and reaping hundreds to thousands of dollars in free credit card rewards.
An Inauspicious Beginning
Since getting my first credit card at 18 years old (I’d fill out any form for a free t-shirt), my relationships with American Express and Visa were like my relationships with men: fun and rewarding at first only to end with much regret.
After getting out of collections, the first time, I would promise myself to use credit responsibly and only charge the regular expenses that I could pay off at the end of the month.
Inevitably, whenever I tried to execute the plan my monthly expenses exploded. It suddenly included more flights, meals, clothes, and shoes than my paychecks could cover in a 30 day grace period. Repeatedly going through the process of creating high-interest debt to slowly pay it off over many months led me to believe that I was simply better off without credit cards.
Protecting Myself From Myself
Without the threat of an overdrawn checking account, I could never stop myself from spending more than I could normally afford otherwise on my credit cards. After a second round of clearing all of my credit card debt, I vowed to operate on a cash-only basis.
I gradually developed a system where I would have my paychecks direct deposited across multiple bank accounts, each with their own purpose. There was one for housing, one for utilities, one for my student loan, another for car expenses, and others that were repurposed for various uses over the years. Whatever I put in each account was how much I was willing to spend on that line item for the month.
It took me years to realize that operating on a cash-only basis was how I stuck to a budget. It finally clicked I needed to use credit cards the same as cash. To make this happen, I needed to know where my cash was going to go ahead of time. In other words, I needed a real budget.
More important than simply creating a budget is actually living according to one. It makes no sense to budget $500 per month for food when I’m regularly spending $800 (I pray the blood of Jesus over the evil spirit of GrubHub).
It took several months of tracking not only my spending habits but my activities in order to put together a realistic budget by which I’ll live. It required me to prioritize my needs and wants and give myself the grace to be me. Would I like to cook healthy meals at home 6 days a week? Absolutely! But will I actually do it after long days at work?
I accepted the fact that it meant more to me to order takeout than it did to hire a regular house cleaning service or go for regular pedicures. Once my budget fit my life it was much easier to swipe my card for everyday expenses and forego additional unplanned spending.
Lessons Learned & My New 3 Rules
I have done a complete 180 on my credit card stance since that road trip so many years ago. Without the burden of interest, credit cards can be a gift and a great way to earn money for everything from free travel to shopping (if I give you a gift card just know Capital One rewards paid for it).
Now, I am not quite ready to join the travel hacking bandwagon. For me, the minimum spending requirements are a trigger for overspending. Until I have reason to spend an additional $4000 or more in only three months to get tens of thousands of bonus rewards I’ll stick to earning a few hundred dollars in free money each year.
If you are like me and once swore off credit cards but are tempted to try to make them work for you now, here are three rules to remember before taking the plunge.
1) Your credit card is a mirror of your bank account, not an extension of it.
Your credit limit is NOT what Chase, Citibank, Discover, or Capital One prints on your monthly statement. Your limit is your monthly discretionary income and any additional money you are saving in sinking funds. I highly recommend having a budgeting system that you have consistently followed for at least three months before moving to a “credit like cash” system. Controlled spending and cash reserves are the keys to making it work so build that habit before adding credit to the mix.
2) Plan how you will reach the minimum spend thresholds to receive sign up bonuses.
Whether it’s cash back, travel points, discounts, or other rewards, your credit card spending should give you back something of value and their best offerings are awarded to new cardholders. Chase’s Sapphire Preferred and Reserve credit cards have offered handsome 50,000 to 100,000 bonus rewards points when you spend $4,000 in the first three months of opening an account. 100,000 points can buy you an international round trip and a few nights in a hotel.
If you do not normally spend that amount for discretionary expenses in a three month period then it is a good idea to time your application to coincide with larger planned purchases. Is your family taking a vacation? Do you need to replace appliances? Can you pay rent for a few months on the card? Put these purchases on your new credit card, because remember, you’ve already saved up to pay for them in cash to reap your bonuses while sticking to your budget.
3) Credit card rewards are great, but you are only coming out ahead if you are not paying interest.
One of the reasons I love the Chase Sapphire Reserve card so much is because of the 3X earn rate on dining. However, that 3% in rewards is obliterated if I carry a balance and have to pay 16% APR on those meals. Keep calendar reminders for your payment due dates, or even better pay off your purchases as you make them. I often make a weekly payment to ensure that I don’t forget that the dollars I see sitting in my checking account are already spent.
Take these lessons and go forth into the land of responsible credit card use.
Are you using a similar “credit like cash” system for yourself already? Are you like the old me and staying away from credit cards at all cost?
Leave a comment and share your thoughts with the community.
Liz is a personal finance nerd who loves to talk all things money-related. She firmly believes that it’s not about how much you make, but rather how much you keep, and is always on the lookout for ways to hold on to more of what’s earned. Liz lives in Chicago, but maintains that deep dish is NOT real pizza. You can find more of her money (and life) thoughts at her blog Open Mouths Get Fed.