Credit cards can be a triggering topic for some people, especially those who have found themselves in thousands (or tens-of-thousands) of dollars of credit card debt.
I certainly didn't start my credit card journey on the right foot...
The mistake I made with my first credit card
When I was 18-years-old, before anybody ever talked to me about how to properly use credit, Bank of America gave me a student credit card with an $800 limit.
Oooooooh boy! I suddenly felt like I had climbed the socioeconomic ladder and I maxed the sh*t out of that card as fast as I could.
I don't remember everything that I bought, but I do remember the $150 Armani blue jeans and $300 Armani sunglasses I picked up at Valley Fair Mall in San Jose. The memories of those two items are still so vivid because within two months I had misplaced the sunglasses, and (being an inexperienced 18-year-old) I washed the jeans without turning them inside out and they lost so much color after just one wash. I was devastated.
Even though I no longer had the sunglasses, and my jeans were faded and shamefully sitting in my dresser drawer, the credit card balance still haunted me. I cut up the card and never spent another dime on it.
Because I was only able to pay the minimum every month, it seemed like the balance was never going to go away. When my student loan check arrived for my next semester of college, I decided I would use some of those funds to wipe out the credit card debt and be done with it. First mistake... first lesson learned...
A year later, and thanks to my job at Target, I found myself with a RedCard that had a $500 limit. I justified using it because it gave me an extra 5% off... but the mistake I made was carrying a balance every month. The 20% interest rate definitely offset any savings I was receiving from the 5%.
Although that second card was a financial mistake initially, I actually still have the account open. The big difference it that I no longer carry a balance on it from month-to-month. Because of the age of the card, it has also helped improve my credit score. They've also increased my limit over the years, so that has added an extra boost to my credit score.
Paying off $20,000 of high-interest credit card debt
Even though I'm in good shape now, I made a lot of mistakes over the years. In 2018, I found myself with somewhere in the range of $20,000 worth of credit card debt. I was flushing hundreds of dollars down the drain every month because of the high interest fees.
In addition to my credit card debt, I also had student loans and a car loan, totaling more than $88,000 of combined debt. Realizing I needed to make a change, I turned to my favorite teacher: YouTube. I spent countless hours watching videos about "how to pay off debt quickly." There's a rabbit hole of those videos, so hopefully I can save you some time with this quick overview of common methods to pay off debt.
The most recommended technique for paying off debt is the snowball method. Dave Ramsey and countless others suggest this method for it's game-like strategy. With the snowball method, you put tackling the smallest loan first. After you pay off that loan, you use that newly-freed money (the minimum payment, plus any extra) to tackle the next smallest loan (the "snowball" effect). And so on. If you're interested in learning more, a quick Google search will return countless articles and video lessons on the topic.
The second technique for paying off debt is the avalanche method. With this method, you pay off your debt starting with the loan with the highest interest rate. Once pay off one loan, you use that newly-freed money to increase your monthly payments on the next loan (the "avalanche" effect). Compared to the snowball method, this method can save you money in the long run because of the interest efficiency.
The third technique for paying off debt, which isn't talked about nearly as often as the other two, is the cash flow index (CFI) method. You order your debts based on their CFI and pay off the loan with the lowest CFI number first. This is an advanced strategy that is even more efficient that the avalanche method. If you're interested in learning more, read this article from Wealth Factory about how to use the cash flow index to eliminate your debt.
At some point in my credit card debt journey, I deployed all three strategies. The snowball method gave me some early wins that were very motivating, so I stuck to that strategy the longest. I also tried the avalanche method for a brief period of time, but ended up switching to the CFI method shortly after.
Bonus: In addition to coming up with a repayment method, I also opened two new credit cards that each offered a zero-interest introductory period. I took advantage of that and the low-cost balance transfers in order to minimize my interest payments. If you deploy this strategy, make sure you're pay the card off before the introductory period end. If you don't, you could find yourself in a worse place than where you started.
For more on my debt journey, read my last post about how my hate for overdraft fees convinced me to create a budget spreadsheet.
How to use credit cards and make money on everyday spending
If the stories above didn't make my point clear, let me be extra diligent and give you the TL;DR version:
The worst thing you can do with a credit card is carry a balance. Avoid carrying balances at all costs. If you already have a large balance, deploy a repayment strategy to eliminate the debt as fast as possible. The high interest is stealing money from you.
If you agree with the above statement, feel free to continue reading. My tips for making money with credit cards will only work if you pay off your credit card balances every month.
My credit card strategy: Curate your credit card collection to maximize rewards.
If you grew up in the era of Pokemon like I did, you know how important your primary team is. Each one has its own strengths and weaknesses, and you need to choose the correct one in a fight if you want to come out victorious.
Credit cards are like Pokemon. In order to make the most money from your them, you need to think of them like a team and choose the correct one depending on the spending situation.
It might sound complex, but it's actually fairly simple.
Here's a look at the five credit cards I carry in my wallet and how I use each of them:
- My Target RedCard offers me 5% off every purchase at Target (in store and online). Although I try not to shop at Target too often (since I always end up overspending), the up-front savings have added up to a nice chunk of change over the years.
- My Chase Freedom Unlimited card is the one I use most often. It offers 5% back on travel purchases, 3% back at restaurants, and 3% back at drugstores. It also offers 1.5% back on all other purchases.
- My second most-used card is my American Express because it gives me 3% back at supermarkets, 2% back on gas, and 2% back at department stores.
- My Bank of America Cash Rewards card allows me to choose a category to get 3% back. I've selected "online shopping" and use this card anytime I buy something online.
- I also have a Capital One Quicksilver card, but the rewards on that aren't very good so I never use it. In fact, I don't even keep it in my wallet anymore. I opened it while I was paying off my credit card debt in order to get the zero interest introductory rate. I keep one recurring monthly bill charged to it so that it remains active and helps improve my credit score.
I know my collection of cards isn't perfect. If I could go back in time with the knowledge I have now, I would definitely make different decisions about the cards I chose.
When building your credit card collection, be strategic. Build a "team" that compliments your lifestyle and purchase patterns.
If you have a hard time remembering which card to use in a given situation, consider putting a little cheat sheet in your wallet. I still refer to a little slip of paper hidden behind my cards whenever I need a quick reminder at checkout.
Once you have your cards, start using them in as many places as possible. I'm definitely not suggesting you go out and make frivolous purchases for the sake of spending. Use your credit card in situations where you might use cash or a debit card. If a store allows you to use a credit card... use it. The only exception might be if they have high fees for usage, but you may want to still use it if the rewards percentage makes sense.
Lastly, and most importantly, pay off your credit card balances every month. I pay off my balances at least twice a month. If your goal is to make passive income from your credit cards, don't let those pesky interest fees steal your money.
And that's it! Please be careful with the decisions you make when it comes to credit cards. Although credit cards can provide a nice little flow of "free" cash every month, they can also be very dangerous if used incorrectly. Debt is scary and can take years (or even decades) to get out of.
Best of luck with your credit card journey!
The contents of this post are for entertainment purposes only and are not advice. This is my story and the journey I've taken. This strategy is not for everyone and may not be right for you. Please consult with an advisor before making any financial decisions.