Using Credit Cards to Pay Expenses?

[Art Vandelay]

I noticed some of you on here are recommending using a cash-back credit card to pay your bills and expenses for the month, and then paying off the credit card balance at the beginning of each month using the money in your checking account. This way you can track your spending better (visualizing the total sum of monthly expenses via the credit card balance), while also taking advantage of the cash back rewards from the credit card. I have never owned a credit card in my life (I am in my mid twenties), and I have been told to never own one since I was a kid from my parents and from others like Dave Ramsey, etc. I am not a big traveler, so I would not necessarily care about any traveling rewards, but for the cash back rewards and for being able to better track my spending, I can see the value in this. Is this something you all would recommend I do? And if so, does this affect my credit in any negative way, and what is the best card to get? I would like to keep things simple. Thanks!

[GizmoTX]

This builds credit! We've been doing this since the 1980's, & we have always paid each month's charges in full. We taught our now adult son to do this too.

I'll say it again: the one absolute rule is to ALWAYS pay off your charges every month, so this means you must only charge what you can pay by the due date. It is NOT TRUE that carrying a balance past a due date builds credit -- all this does is make your purchases much more expensive from compound interest that is charged. Also, keep your charges to no more than 20% of your credit limit; maxing out a limit also drops your score. Later on, when you've proved to yourself & the CC bank that you can handle it, ask for your limit to be increased and/or add another CC. Some people use a credit card for emergencies but this is dangerous unless you have an emergency fund saved in an online high yield savings account equal to 3-6 months of expenses. Dave Ramsey is against credit cards because the people he encounters don't have the discipline to do this & he personally experienced a traumatic bankruptcy. However, I think there is much danger in using a debit card for purchases, because of the risk of getting your bank account drained fraudulently. Credit cards offer protection in case your account is hacked or card stolen.

Since you've never had a credit card before, you will likely need to start with a small limit & perhaps lower cash back rewards. First sign up for a free account at Credit Karma -- this gives you free credit reporting & you can get recommendations on cards you will likely qualify for (this is how CK gets funded). When choosing a card, pay no attention to the interest rate, because you aren't going to pay any, right?! Put your due date on a calendar you regularly check & schedule an online payment every month without fail; paying late really messes up your credit. If you decide to do autopay, make sure you still look at every transaction and of course have the money in your checking account. I always download & import our credit card transactions to the YNAB (You Need A Budget) app, which lets you give every dollar a job, reports on your income & spending, & lets you reallocate if necessary. DR touts a similar app called EveryDollar. When you do have a CC, freeze your credit; see Clark Howard's website for details. Eventually you will want 2 accounts, just in case your bank cancels your 1st one or your card gets damaged. If you ever travel overseas, make sure you only take a card that doesn't charge a foreign transaction fee.

[terran]

A good cash back credit card is basically an instant 1.5-2% discount on (almost) anything, can be more on some things, doesn't have the risk of carrying around cash (loss or theft), or the risk of using a debit card (no money in your account until fraud is caught and cleaned up). But all of those things are completely overshadowed by irresponsible credit card use, which is why credit card companies still make boat loads of money.

If you're currently saving lots of money and not spending as much as you make (like most mustachians, unlike most people) then you probably have the mental discipline to be a responsible credit card user, so give it a shot. The instant you sense yourself spending more than you otherwise would because "it's on credit" or the first time you don't pay it in full when due, get yourself under control (because you're no longer being responsible) and possibly cut up the card.

If you're not confident you can be a responsible credit user or you're still a baby mustachian sometimes spending more than you earn, then maybe hold off on the credit cards for now.

If you don't have any real credit history you might not get a great cashback card, so just get whatever card you can and build some credit before getting the card(s) you actually want.

[35andFI]

If you can do these 2 things, you SHOULD get and use a credit card:

1) Not spend more than you would with debit or cash
2) Pay the balance in full every month

I use and recommend Discover it card and Chase Freedom card for 5% cash back on rotating categories and 1% on everything else.

Also, I use and recommend the citi double cash card for 2% on everything.

So I essentially get everything that I buy for 2%-5% less.
Another reason to use credit over debit or cash is for the fraud/theft protection that you get.

Some or all of these offer referral bonuses.
If you’re interested, shoot me a PM.
I know Discover offers $50 to both parties.

[wenchsenior]

We buy virtually everything, and have automatic bill paying, on our frequent fliers credit card.  We pay it off every month.  We rarely pay for flight, except on very short notice or when we have very specific tight scheduling needs.

[pk_aeryn]

So I essentially get everything that I buy for 2%-5% less.
Another reason to use credit over debit or cash is for the fraud/theft protection that you get.

And to add onto this, most major cards will offer an extended warranty, usually one year or doubling whatevee the manufactuer warranty is.  Great for buying electronics these days that are made to last 2 days after the manufactuer warranty.  I’ve used this for a computer repair.

[Monocle Money Mouth]

I’m also in the charge everything and pay it off at the end of the month club. If you don’t see your credit limit as a potential to spend more than you can actually afford, you will be fine. Just pay your balance before any fees or interest are charged.

I also use any cash back bonuses I have accumulated as soon as they are available to help pay my bill every month. I don’t let it sit. If you let the money sit, it isn’t earning any interest and is losing its purchasing power to inflation.

[kpd905]

If you want to keep it simple, just grab a Citi Double Cash and get 2% back everywhere.  If you want to make more than 2% back, then you can look at Chase Freedom and others, or start to look at hitting sign up bonuses where you can get 10%+.

For example, Chase Sapphire Preferred will give you about $540 after spending $4,000, which is 13.5% back.

[Rob_bob]

My credit card rewards are linked to my Amazon account so I often buy things for free.

[bluebelle]

For the purposes of my answer, I am assuming 3 things:
1) you will pay your credit card off in full every month
2) you will be offered a low credit limit to start since you have little credit history
3) you don't make a zillion dollars, and thus won't be offered a high credit limit

With those assumptions, the only way a credit card can hurt your credit rating is if your credit utilization is above 30% at the time a credit report is pulled.  It is somewhat counter-intuitive, but having a low credit limit, say $1,000 and having a balance of $900 hurts your credit score more than having a limit of $40,000 and having a balance of $10,000, the former has a utilization of 90%, while the later has a utilization of ONLY 25%.   If you are responsible with a CC, a higher limit is a good thing.

One way to mitigate spending more than you should on a credit card or impacting a credit score if you have a low limit is to always pay off the credit card after every purchase instead of waiting until the end of the month.

[FireHiker]

I am another who puts every penny of expense on credit cards that I possibly can. We always pay in full every month, treating it like cash. Using credit cards gives you a built in safety mechanism in the case of fraud (much easier to dispute a credit card charge than to have your bank account cleared out via compromised debit card). I also like that I have a clear record of money spent in a way that's easy to find. We do like to travel so we work the system and have gotten thousands of dollars of free travel out of strategic rewards cards. Since you said you aren't much of a traveler I would recommend a cash back card like others have said here.

I like to refer to Dave Ramsey as general ed/finishing high school and MMM as a graduate degree. Most people would be better off following DR's advice as opposed to being obliviously in debt. But, once you are able to be disciplined, he leaves a lot of optimization on the table.

[Kayad]

One other benefit; if you someday want to take out a mortgage to buy a house, you need to build a (good) credit history.

[Bernard]

David Ramsey attacks the basic problems with humans and money. No plan, no clue, no discipline. They become victims of the lure to buy now and pay later. That's why Americans are in such deep sh*t. It's designed to work that way and the banks benefit from it. Credit cards are helping businesses to sell shit people don't need with money they don't have to impress people they don't even know let alone like.

But if you are disciplined, you graduated from Dave Ramsey's entry level wisdom, to the FIRE path. I've been paying cash almost exclusively whenever possible, own my home and have a 841 FICO score. The reason why I pay (payed) cash for everything is that it's harder to trace for the tax man. Imagine you have an income of $3,500 per month going into your checking account, and another $3,500 per month your boss gives you cash. If you then spend $5,000 per month and save $2,000, you'd have to put cash into your bank account to pull this off. Which is not a good idea if the IRS looks over your shoulder. If you pay cash for as much stuff as possible, nobody will ever know how much much money you spent on gas, hobbies, vacations, and eating out.

That out of the way, I'm now putting about everything on a credit card, because I use the sign up bonuses for free vacations, flights and accomodations. That's called travel hacking or credit card churning. It's basically free money, hundreds, no, thousands of dollars per year for no other reasons that you use a certain credit card.

So if you are financially responsible and have control over what you are spending money on, you absolutely will use credit cards to work for you. True, Ramsey doesn't need one. He paid cash for his $5,4M home in Tennessee and has another $55 million in the bank.He could roll up $100 bills as toilet paper, and still not run out of money in his lifetiime.

[ysette9]

The reason why I pay (payed) cash for everything is that it's harder to trace for the tax man. Imagine you have an income of $3,500 per month going into your checking account, and another $3,500 per month your boss gives you cash. If you then spend $5,000 per month and save $2,000, you'd have to put cash into your bank account to pull this off. Which is not a good idea if the IRS looks over your shoulder. If you pay cash for as much stuff as possible, nobody will ever know how much much money you spent on gas, hobbies, vacations, and eating out.

Are you actually advocating tax fraud here?

[pk_aeryn]

The reason why I pay (payed) cash for everything is that it's harder to trace for the tax man. Imagine you have an income of $3,500 per month going into your checking account, and another $3,500 per month your boss gives you cash. If you then spend $5,000 per month and save $2,000, you'd have to put cash into your bank account to pull this off. Which is not a good idea if the IRS looks over your shoulder. If you pay cash for as much stuff as possible, nobody will ever know how much much money you spent on gas, hobbies, vacations, and eating out.

Are you actually advocating tax fraud here?

Yeah, tax fraud is not Mustachian or frugal.  Even if it were (it’s not), I don’t think this is actionable advice for most people. All of my paycheck is deposited electronically, I don’t have a choice about this. I don’t get paid in cash.  I realize some people do, but that’s not the majority of people on this forum, I’m guessing.

[Bernard]

People whose paycheck is posted on their bank account have no choice. But people who get paid in cash or have a side gig going have options. Of course I'm not suggesting for anybody to cheat on their taxes. I simply used the example to make a point.

[seattlecyclone]

People whose paycheck is posted on their bank account have no choice. But people who get paid in cash or have a side gig going have options. Of course I'm not suggesting for anybody to cheat on their taxes. I simply used the example to make a point.

Why bring it up if you're not suggesting it?

You say that depositing cash you earned in your bank account "is not a good idea if the IRS looks over your shoulder." Why would that be? Seems like if you're reporting and paying taxes on all of your income there would be no problem whatsoever from depositing your cash income into your bank account.

[Lmoot]

I would calculate the monthly expenses that are eligible to be paid by credit card, and get a card with no more than double that limit (account for larger expense months). So if your cc-eligible expenses are $1000/month, get a card with a limit of $2000.

I use my cards for everything, (I have 11), like using them as a loan (0% promotional rates), and change the card I use based on the type of purchase and what gets me the maximum cash back. For example, I have a card that earns me the most cash back for gas, another for restaurants, another for travel, another for grocery...etc.

I have even used my cards for free "cash advances"; I'll sign up for a balance transfer promo, and if I don't have anything to transfer I will still transfer a couple thousand from the card I use the most (general purpose), so that it goes into a negative balance. So if I am at negative $2000, that means I can spend on the card without having to pay anything up front, until I spend the negative balance of $2000. Then the only thing I have to worry about is paying the minimum on the card I transferred the balance to, and make sure I pay it off before it's due (typically 12-18 months).

Obviously I don't think this is the correct current course of action you should take, but I wanted to show the opportunities that abound in the magical world of credit cards. Credit cards can give you a lot of control over your finances and can earn you points, but also save you interest since you can take advantage of the many 0% promo offers out there, vs getting a loan or borrowing from your 401k (which astounds me how alot of the same people who have chided me on my cc habits, have paid way more in interest and fees for borrowing money, than me. Ex. I currently have $40-50k in cc debt...paying not a cent of interest. I renovated my fixer upper $40k worth...paid no interest).

CC get a bad rap, and fortunately with new laws it is harder (but not impossible) for cc companies to be tricksters. So you still need to educate yourself. If you have a sturdy efund, then by all means play around with paying expenses off with a credit card, or even borrow so that you can save your cash earning interest in your savings account.

The best single piece of advice I can give you, and which I still remind my self, is to never spend credit AND cash (except for expenses that can only be paid with cash). That's when it seems people get off the rail. They are only using their card for "emergencies" or for "gas". That shit's too confusing IMO. If you're going to use your credit card for expenses, use it for ALL expenses, and then keep ALL of your net income in cash accounts, ONLY taking cash out for cash-only expenses, and to pay off your monthly credit card bill.

[mattchaos]

i wouldnt

[nereo]

I agree with those who have said: as long as you can avoid spending more with credit cards and can pay off your balance in full every month you **should** pay for everything with credit cards.    There's clear advantages to doing so (building credit, digitally tracking your expenses, getting rewards, having more recourse should a payment or purchase be contested).

[Rosy]

Having credit cards at your fingertips to use if you need it - that's a good thing. Even if you have saved up a nice stash, if doesn't always make sense financially to tap your cash stash or something happened at a time when it may just cause you hardship for a brief time to spend your cash or close your CD (penalties). While it usually only takes about seven days or so to pull money from your investments - you may not want to at that particular time or you may not have the luxury of actually waiting that seven days - sh$t happens at the most inconvenient times:).

I have four, but given my spending patterns and expenditures two would be fine and five would be my absolute max - sometimes a $300 bonus and no interest on your purchase and zero percent interest on everything for up to 18 months comes in handy - like when you have a home improvement project or an elective surgery.
Yeah, I'll take a 2% reward on a $6000 eye surgery not to mention the $300 bonus for opening the card and spend their required minimum in 60 days to get that bonus.

The way I chose my card is that I paid attention to all the fine print and evaluated whether the card fit my spending patterns. A very easy way to do this is to have a look at a well established, reliable blog - like the doctorofcredit.com . Take some time to search and read up on the best credit cards before you apply online.

The only reason I would dissuade you from say getting two credit cards would be if you feel that you do not have the discipline to pay them off each month.
 Otherwise, you are in essence leaving money on the table - take advantage, but only after you did your research.
It adds up over time - I literally "made" about $1K last year incl a bonus and $400 so far this year with no bonus and no travel - Mr. R. has his own cards and I make sure he takes advantage when his BOA card offers a $50 Lowes card for $40 - he doesn't always remember his points, so he usually has a nice stash by Christmas.
If you get an Amazon card you will get 5% on all purchases at Amazon, lower % on other purchases. There are cards that give you 5% on rotating categories that change every three months - so I use my Chase Freedom card when it offers 5% on groceries or gas. Shrug - easy money.

  The thing is rewards cards always have a higher interest rate so it makes no sense to carry a balance on a card with say 22% interest. I do have a card at 9% interest that offers 2% to 3% rewards on everything plus some very nice perks that I am happy to have and use. I'm not spending much at present so I only get $50 in cash every other month - but hey:).
My oldest card is 12% interest and I have been caught a few times when I didn't pay off the entire bill. So that year I paid $64 total in interest - in a way still worth it to me for various reasons, but it would have been a problem if I found I was stuck with interest payments of 12% each month because I could not afford to pay my balance off in full.

... I agree with nereo - especially about having instant recourse if you need to contest a purchase and in your case building credit is a good reason to have a credit card as well.
The doctorofcredit blog has a good post about what builds credit and what does not.
The important thing is to keep your credit card use low if you want to build credit and/or get a higher limit.

When I do spend a lot I pay it three to five days before it is due which affords me the opportunity to "float" that money for thirty days and get 2.5% interest while it is languishing in my savings account.
It's just one more way to get free money - legally:) - it all adds up by the end of the year.

[Kierun]

In addition to the above, don't forget to look at cards that have no annual fee.