From the day I got my first credit card, I used it the wrong way. Rather than use it to pay for regular expenses, build my credit history and pay off the balance each month, I used it to pay for everything that didn't fit into my regular budget — and then some. It only took a few years for credit card companies to extend thousands of dollars to me thanks to my credit limit, which I maxed out. I grew to dread seeing the balance on my credit cards.
It got to the point where I avoided looking at my credit card statements altogether, peeling back just the corners so I could see what the minimum payment was and then throwing them away. It wasn't until a year after I paid off all my outstanding debt that I finally started to use credit cards the right way, and now see them as one of the best tools in my budgeting system.
Something I've discovered in my years of writing about personal finance is that many of us take this similar path with our credit cards.
Robb Engen got his first credit card in university, when he says he shouldn't have even been thinking about borrowing money. “I didn't use it much at first," says Engen, author of the personal finance blog, Boomer and Echo. “But when I moved out of residency and into my own home, that's when I started misusing it." Engen started bringing it out to the bar, and taking out cash advances, and it didn't take long for him to max out his limit. “It was the cardinal sin. I still cringe thinking about that."
Rebeca Solares's story is almost identical. “I got my first credit card when I was 18, shortly after I graduated from high school," she explains. Solares adds that she didn't use it often, at first, but that's perhaps because she was living at home and going to school. "When I moved out to Minnesota, after school, I had no money so I was using credit a lot. I'd pay for my groceries by credit card and think, 'I'll pay it off next payday.' I quickly maxed out my credit, doing that."
Fortunately — or unfortunately — being maxed out forced Engen and Solares to change their ways. But it wasn't until they were debt-free that they began to use credit cards to their advantage. “I paid off my credit card debt and then stopped using them for a while," says Engen. “Instead, I used debit and cash, budgeted, and was just really careful with my money." The turning point came when he and his wife realized they could use credit cards to earn rewards instead.
With careful budgeting and the right cards, Engen and his wife began earning more than $1,500 per year in credit card rewards. And it took Solares time, but she's now in the same boat. "I use my cards to earn travel rewards now, but I can pay them off every month," she says.
For some, learning to harness the power of credit cards is a skill that's developed over time. Just keep in mind that credit cards are a powerful tool: if you use them to your advantage, and pay off the balance each month, the returns can be great.
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