Credit Card: Friend or Foe?

• Improving your cash flow 
• Earning more interest by keeping a higher balance in your savings account
• Receiving perks from credit card rewards programs 
• Improving your credit score
  

But be warned:  Using a credit card irresponsibly can be very dangerous.  Too often I’ve seen people dig themselves into debt by spending too much on their credit cards without a proper plan to pay them off quickly.  They get a credit card in their hands and spend like crazy, without regard to whether or not they can afford it.  If you are one of those people, do not use a credit card.  The interest you’ll pay will be far more than any benefits you’ll receive. 
Let’s look at an example of someone who uses a credit card responsibly: 
Dave spends $5,000 cash per month on his expenses.  He maintains a balance of $10,000 in his bank account, which earns 5% interest.  Dave obtains a credit card that has no annual fees and gives 1% back on all purchases.  Instead of paying cash for his expenses, he begins charging the $5,000 per month.  He gets to hold on to that $5,000 in his bank account for an extra month until his credit card payment is due.  So from now on, he will maintain a balance of $15,000 in his savings account.  The 5% interest on that extra $5,000 results in additional interest income of $250 for the year.  He’ll also receive 1% back on his purchases, which total $60,000 for the year (12 months x $5,000).  So his cash back from the credit card will be $600.  At the end of the year Dave is $850 wealthier because he used a credit card instead of cash.  By paying his bill on time every month, he also improved his credit score.
When it comes to credit cards, the single most important action you should take is to pay off your full balance every month.  Consider this a must.  The interest rates on credit cards are egregiously high, often over 20%.   To be clear, don’t just pay the minimum amount due.  Pay the entire balance every month.