Plastic is a very important material in today's world - it makes up so many of the containers we use, is an extremely common component in electronics and many vehicles and has even made its way into many currencies, including our own. But when people talk about "using plastic," it more often than not is referring to the plastic cards in our wallet. And not just any card, but credit cards, specifically. Debit cards, driver's licenses and reward cards are all plastic, too, after all!
When it comes to good personal finance, credit cards are often frowned upon, and the most common advice is to avoid using them at all. I'm here to tell you that you are missing out an an investment by not using credit cards. The way credit cards work is that the credit card company (Visa, Mastercard or American Express) will reach a deal with many credit card issuers. Credit card issuers are companies that include financial institutions such as banks, credit unions or some major retailers like Canadian Tire or Hudson's Bay that "brand" the credit cards and get people to sign up for them.
Using Visa as an example, Visa makes money from the retailer when anyone uses any Visa credit card to make a purchase - and that revenue typically hovers around 1 - 3% of each purchase with a minimum amount often added, too. This is why local stores sometimes have signs saying they only take credit cards on a minimum $5 purchase. It's not that they can't take your credit card, it's that the minimum fee that Visa charges may be 25 cents plus 1 - 3%, which for a small purchase could be 10 - 20% of the entire purchase price, which would probably take any profit away from the retailer. Retailers can manage these fees they pay to Visa in a couple of ways - either treating it as an expense that is part of the total Cost of Goods Sold (COGS) or by simply adding the average credit card fee to the price of all goods sold. In either case, it's a fair statement to say that most major and chain retailers have priced consumers using credit cards into all of their products already.
The credit card issuer will make money on cross-selling products, any credit card annual fees and interest paid on carried balances. Based on these revenue sources, issuers will not complain if you only make minimum payments and spend a lot of money on your credit card, which is a major factor where the advice to avoid credit cards completely would play in. The issuers' best interests are not aligned with your personal finance best interests.
So, why would I recommend "investing" in credit cards? What I've found is that when I treat credit cards like debit payment methods with monthly invoices, I never have issues with credit usage. But, for this to happen, you need to hold these three important mindsets:
- You must have the money in your bank account at the time of purchase to pay for each and every purchase you make on your credit card.
- You must ignore your credit limit - the only thing that matters is how much is in your bank account.
- You must treat each monthly statement as a non-negotiable invoice of expenses for the last 30 days and pay it off immediately.
If you can train yourself to consider these three points each time you use your credit card, it will help reduce any fuel to use it for non-necessary purchases and live within your means, the way you would have to if you used cash or debit. If you are new to using credit cards for everything or are afraid of getting carried away, start with recurring and necessary things, like groceries, gas and utility bills. After a couple of months of doing that, you will better estimate how much you need each month to transfer from your bank account to the credit card and can plan accordingly.
Now, the benefits. With so many different cards, it may be hard to choose one. From my experiences, the most valuable ones tend to have no annual fee and give you at least 1.5% cash back on gas and grocery purchases. I like cash back over travel rewards points as cash back does not convince you to spend money on things you would not have otherwise bought. Even if you only spend $500 a month on these major expense categories, that is $90 a year in free money from your investment that you would not have otherwise had. That pays for a couple of gas fill-ups completely! The other nice thing is this "interest" stacks on top of gas loyalty points or grocery store loyalty points. So, depending on the combination of credit card and loyalty program, it is possible to get 5 - 6% back in some cases!
If you have had experience with using your credit card for most purchases already, I would challenge you to look at "premium" cards that have annual fees and do a cost-benefit analysis. In fact, I have developed a calculator to help you choose the best credit card based on your typical spend! Click the button below to download a spreadsheet that can help you pick the best credit card for you:
The calculator can help you predict the return you can expect from various credit cards when considering your typical usage. It's worth it to see if any cards have limited-time bonus offers, too, as these can be valuable. Rate Supermarket lists most credit cards available to Canadians today with annual fees, earnings rates and offers listed for each. Take a look and plug the values into the calculator to see what you could get back for your expenses. Just make sure you read the specific details for each credit card so you understand which categories the earn rates apply to, and what the standard earn rates are after initial bonus periods.
So, like choosing a unique rubber duck, find the plastic that suits you best!