Should you pay your mortgage or rent with a credit card? How about other expenses or should you use credit cards at all?
Are credit cards weapons of financial destruction or tools to make your life easier? How can you get the most out of your credit cards and should you even use them at all?
It seems people are split on using credit cards. I know a few travel hackers that live by their credit cards, earning points for vacations and other discounts. I also know more than a few financial experts that think credit cards are the worst thing you can do to your finances.
To tell you the truth, I don’t know where I stand. The idea of getting free points and cash back makes sense, appealing to my investor side.
On the other hand, I know that I haven’t always been the most responsible credit user. I’ve made impulse purchases and haven’t always paid my balance at the end of the month, paying way more interest than I gained in points.
After racking up thousands in credit card balances, I needed a debt consolidation loan to pay them off.
How can you decide what to pay with a credit card and even whether to use one at all?
Is Paying with Your Credit Card Bad?
Credit cards are just short-term loans. Trying to figure out whether credit cards are good or bad means deciding whether loans in general are good financial tools.
As an investment analyst, I always come back to the interest rate. What kind of rates are you paying on other loans? Can you get special deals on your credit card rate?
If you pay off your statement balance each month, you effectively pay a 0% interest rate. It’s hard to argue that’s not a great deal.
Of course, that’s where things fall apart though. If you don’t pay your statement balance, you could be looking at rates of 14% and higher. There’s also the annual fee on some cards that you’ll have to pay whether you owe interest or not.
Credit cards serve another purpose beyond convenient cash and bonus points. The monthly payments you make will be reported on your credit report. Using a credit card can be an important way to build your credit score for students with limited credit history.
Given all the pros, I’d have to come down in favor of credit cards but with a big disclaimer. Having a credit card is just something else to manage beyond saving, budgeting and investing. It might not be that much to manage if you don’t use your card much or it can be a big stress in your life. How should you get started with credit card use?
How to Get the Most Out of Your Credit Card
I use my credit cards for four reasons; emergency spending, rewards, building my credit score and business spending.
1) Everyone needs at least one credit card just for emergency cash. It’s best to have the card exclusively for emergencies and not use it for anything else. You don’t want to have a $5,000 car repair bill pop up and not have enough left on your emergency card to cover it. For this card, find one with a low rate and no annual fee.
2) I travel a lot to conferences and other business meetings so it’s great to accumulate miles that can be used for free flights. The problem is that a lot of rewards cards have higher rates and annual fees. That might not be a problem if you bank hundreds in reward discounts a year and pay your statement balance each month.
3) My FICO passed 740 last month but it wasn’t always that high. I destroyed my credit in 2008 and credit cards were a good tool in rebuilding my score. If you’ve got no credit history, find a card with no fees and the lowest rate you can get. Use it for weekly grocery shopping but don’t use it for anything else until you get used to spending within a budget.
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4) I also have a credit card for business spending. It makes keeping track of business deductions so much easier. Whether you open a card under a business account or just have a personal card for business expenses, it will make your life much simpler.
Should You Pay Mortgage with a Credit Card?
Paying for groceries and other necessities with a credit card has always been an easy way to get reward points and build credit history. Readers often ask if they should pay the mortgage with a credit card as well.
We don’t pay our mortgage with a credit card simply because it would cost an extra processing fee. It costs an extra 2% to pay our mortgage by credit card so that pretty much wipes out any rewards points we accumulate.
If you can pay your mortgage using a credit card and avoid the processing fee or get the fee under 1%, I’d say go for it. It’s a big monthly expense so you’re going to be earning massive points or cash back.
Just make sure you pay the card off every month!
Should You Pay Rent with a Credit Card?
Is paying rent with a credit card any different? It might be.
Whereas your mortgage servicer will almost definitely charge you the processing fee, you might be able to get your landlord to pay the fee. If your landlord has Square or some other credit card processor, ask if you can pay your rent by credit card.
The processing fee is charged to the person using the service, your landlord in this case. If they only charge the amount for rent, you might get out of paying the fee entirely. If your landlord brings up the fee, ask if you can split it with them. For most services, that will mean 1.5% or less for each of you.
There are a lot of reasons to use a credit card and you can get some good benefits from them. Paying your mortgage or rent with a credit card can be an easy and fast way to earn reward points or cash back. Make sure you only spend as much as you can pay off at the end of the month to take advantage credit card perks without the risks.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.