Hate it or love it, credit card has been part of our life. Almost every American adult now uses credit cards. You see credit cards are used everywhere: at retail stores, online merchants, or even in fast food restaurants these days. One important question is “WHY so many people have used credit cards?” Amazingly, it is also the least asked question. And even if it were brought up, the most likely answer would be “why not?” It is crucial to your financial success to really understand the credit card game in order to get yourself its advantages instead of disadvantages.

As widely used as credit cards, many people still believe they resemble gambling, where card holders are gambling addicts and credit card companies are casino owners. Once you get involved with credit cards, you seem to lose financial self-control and keep spending beyond your means. And eventually you’ll fall victims to credit card companies, your money-suckers. In this context, nothing would be more evil than credit card companies. They set their traps within the fine prints, where no one would pay enough attention to the details; they have the power to make their own rules of the game, like how finance charges are generated or how interests are compounded; they make their own definition of when the payments are considered late or what constitute an over limit. Even worse, they can increase interest rates any time they want, based on any criteria they see fit. So if you can’t pay off the balance, what would that leave you? A sore loser!

But many other people, including myself, don’t see it that way. The truth is, YOU can also be the winner, if you know how to play the game. And unlike gambling situation as mentioned above, you can pretty much control your own game. Well, yes, it’s true that lots of bad things happen to a credit card holder if he/she can’t pay off the debt. But think about it, why could the card holder incur the out-of-control debt in the first place? Do credit cards have some kind of witchcraft power that seduce their users like many people believe? Let’s take a closer look.

First of all, “seduction” is a bad excuse. It’s all about self-control. If temptation were to blame for our “sins,” then we would be left with nothing in life. Eliminating credit cards in fear of unpayable debts is like destroying all alcohol products in fear of alcoholic addiction, or abandoning all sexual desire in fear of sexual assaults. It’s the mis-use of such subjects that gives rise to negative effects. The subjects themselves are neither good nor bad. Furthermore, people who tend to spend beyond their means will be likely to get into debt with or without credit cards. Have you had any friends or relatives who borrow money from you and never pay back? You’re lucky if you haven’t. I do have a few friends and relatives like that, and it has nothing to do with credit cards. Finally, the losers of this credit card game are very likely to enter the game for the wrong reasons. Let me explain further below.

This may sound contradictory, but here is my thought, that you should ONLY get a credit card when you don’t need it. Why? Well, it’s simple. If you use credit cards because you don’t have money now, that’s the wrong reason. If you don’t have money now, how can you be sure you’ll have money in a few weeks or months later? That’s why most people get into debt and find it so hard to get out. And believe me, credit card companies love people like that, because that’s where they get most of their revenues from. It’s obvious who are the winners and losers in this situation. Now, why would you use a credit card when you don’t need it? If you have money in your bank account, you can just pay for your purchases using your checks or debit cards (your own money). That’s when you don’t need a credit card. However, you may still want to use a credit card just to get all the benefits it can offer, without paying any cost for it. Then you’re the winner. With that said, let’s look at several benefits of a credit card you can take advantage of:

1. No annual fee: if you’re not in financial troubles, there’s no reason why you can’t get a credit card with no annual fee. If you have no credit history and can’t find one offer like that, you can simply get a pre-paid credit card to establish a credit history, or simply take out an auto loan or student loan to begin with
2. Grace period: most credit cards wave interest charges if you pay off the balance at every monthly due date. So you basically have in average 15 days of interest-free money. Suppose your checking account earn interests, you can actually get some interest income out of this interest-free money, because instead of paying the merchants right away every time you shop, you can delay the payment and get paid for that “delay.”
3. Most significant benefit: cash-back, mileage, and points for later discount or free merchandise. I don’t travel a lot, and try not to shop too much, so I only like the cash-back option. I currently carry an American Express card that pays me back from 1% to 3% for every purchase, and also a Visa card that gives me back 1% on all purchases. For those merchants who don’t accept American Express, I can just use the Visa card to reap this benefit. I pay the balances in full each month and get the cash-back like free money!

So as you can see, credit cards can be good, but only when you are in control of them, not the other way around. That’s why I said “you should only get a credit card when you don’t need it.”

Well, not many people are lucky enough to be able to pay off the credit card balance each month. How do I know this? You should know that before I got control of my debts a year ago, I was the “sore loser” for a long time. I couldn’t pay off my credit card debts, so I carried a balance month after month for almost 7 years. It was horrible. The finance charges that I paid during those years would have made me a fortune. However, I did learn a very useful tip that helped me save quite a lot of money: the shady rule of grace period. Let me explain further below.

Most credit card companies I have experienced offer a grace period of 25 days if (and only if) the monthly statement balance is paid in full on or before the due date. In other words, if you carry a balance over after the due date, then there will be NO grace period! Now what does that mean? Let me give you an example. Suppose you carry $5,000 debt on your credit card as of the beginning of the month, and the annual interest rate is 12%, or 1% a month. You still use the same credit card to shop during the month for $1,000 each month, and then you pay $1,500 before the due date. Here are the 2 scenarios:

1. Scenario 1: if there is a grace period for the new purchases (as you may have thought), then the new $1,000 will be interest free. So the total interest for this month would be $5,000 x 1% = $50. And when your payment of $1,500 is applied, $450 will be available to pay for the principal. Then, next month’s carried-over balance will be $5,000 - $450 = $4,550
2. Scenario 2: if there is no grace period for the new purchases (as is the case for most credit card companies), then the new $1,000 charges may be resulted in an averaged balance of about $500 (suppose your shopping was spread out equally during the month, then for simplicity, the average monthly balance is half of the total purchases). So the interest will be calculated on the balance of $5,000 + $500 = $5,500. Interest will be $5,500 x 1% = $55. After your payment of $1,500 is applied, you still owe $5,555 at the beginning of next month (difference of $5).

Five bucks, you must have thought, big deal! But think about it, the example above only assumed 12% interest rate and $1,000 monthly purchases. Most credit cards carry a higher interest rate than that, and many card holders shop more than $1,000 a month. Then you can see it’s more than just five bucks. Also remember that it’s only for 1 month. This “five bucks” amount added every month and compounded daily can really add up in the long run.

To tackle this problem, I consolidated all balances into one account that offered the lowest interest rate. I never used that account for shopping, but tried to pay as much as I could every month. In the mean time, I used another account that offered cash back for shopping, and paid off the balance before the due date every month. That way, I had a lot more control on how much I owed and how fast I could pay it off. Of course it took discipline and commitment to pay off my debts, but you can imagine how happy I was when they were completely eliminated. As I mentioned before, now I actually make money out of my credit cards in form of cash back, instead of paying for finance charges like many people do.

Even more importantly, my credit score has been above 800 for a while. When I took out an auto loan 5 months ago, it was not because I needed the loan, but because they offered me only 2.9% financing! So I figured, even a junk CD could earn well above 4%, so why shouldn’t I accept that loan? Again, it’s interest-free money. And it will make my credit history even better. I haven’t bought a house yet (due to the potential fall in house prices). But I know for sure, I will get a good deal with mortgage due to the excellent credit I have built. You see, I could beat the credit card companies to become a winner, now you can too!