Are Credit Cards Safe For Financial Independence?

Can Credit Cards Be Effective for F.I.?

The financial independence community often demonizes the use of credit cards. The words of advice that are commonplace in the personal finance realm suggests you pay for everything in cash. Guys like Dave Ramsey even go so far as to encourage that you cut up your credit card. 

But wait, this cannot be the only way. We should not have to carry pockets full of cash around just to fit in with the financial freedom crowd. Why do I have such a problem with this "cutting up the card" advice? I will tell you why. Cutting up your credit card to avoid spending does not correct the actual behavior of overspending.

I agree, it adds friction to the process which many psychologists believe will interfere with the participation in an undesired behavior. In this illusion of self-control, you would add friction to your undesired habit as a means to decreasing the likelihood you will participate in said habit. A smoker would lock their cigarettes in a cabinet and hide the key down the block as a method for increasing friction between them and their undesired behavior.  Cutting up the card is like hiding the cigarettes. It fails to address the poor habit head on. 

Credit Card Rules To Abide By

1. Pay the balance, in full, every month. Do not carry a balance. According to Chris Hogan in Everyday Millionaires, the average millionaire pays there revolving credit balance in full, every month, and never carries a balance.
2. Check your balance on all lines of credit every single month.
3. Take advantage of your free annual credit report. Check this every year for errors. Trust me, you will be amazed how inaccurate your credit history can be and how it can negatively effect your score. You will be able to dispute any errors and improve your overall credit score.
4. Pay attention to any rewards calendars and be aware of any bonus periods for certain categories of spending.  For example, if you have two credit cards and one of them has extra cash back on groceries this month, then use that card for typical grocery spending (this does NOT mean spend extra just because there is a reward).

Where credit cards shine

First up is credit card rewards. The fellas over at ChooseFI have a great section on their site about travel rewards and credit card rewards. Cash back, bonus points, airline miles, travel rewards and hotel credits are some of the many perks that certain cardholders can participate in with disciplined use. Without a credit card you cannot participate in these rewards. Remember however, these credit card rewards are not actually for your benefit (at least they are not supposed to be). These rewards exist to encourage spending behavior. Period. You are lying to yourself if you say that rewards will not encourage you to spend more. It will, unless you are hardcore about recognizing your spending habits and budgeting. This is why you have to "game-out" rewards and turn the tides in your favor so that you can benefit from something that was originally intended to cause you harm (in the form of overspending). 


Next up, cards can help build your credit score. To do this, you need to pay particular attention to some important factors in order to build your score:

• Payment history - Be on time and consistent.
• Credit utilization - Keep it to less than 25% utilization rate.
• New Credit/Credit mix - Different types of credit including, but not limited to: mortgage, installment loans, credit cards, etc. will improve your score.
• Credit history and length - Keep your oldest card open as long as the full balance is paid every month. 

Why is building a credit score important?
The benefits of a high credit score (720+) include:

• More favorable interest rates on loans and credit
  • Less interest paid for good spending behavior. This is not permission to spend more or loosen your grip on spending habits.
• Higher approval rates for loans/credit
• Better car insurance rates
• Increased approval rate for rental properties
  • More and more landlords are using credit scores to determine your worth as a tenants

The final credit card benefit worth mentioning is the added safeguards of carrying a credit card vs. carrying cash all the time. If you think this doesn't apply to you, think again. Lost your wallet? Just immediately call and freeze your credit card. If there was cash in your wallet, likely forget you ever had it.

Pulling out your wallet or money clip and revealing some serious paper is asking for trouble. Remember, criminals are looking for targets. If they see you at the checkout shuffling through your $100 bills to pay for a light bulb you might have an expected encounter on your way out to your car in the parking lot.

In Closing

Yes, you can be both frugal and have a credit card. Just manage it responsibly and it can be an asset instead of a hindrance. Spend wisely and continue to find ways to improve your saving habits and spending behavior.

​Let me know your thoughts in the comments below.