Credit cards can be controversial, which makes it a good topic of this week’s episode of The Invested Dads. Josh and Austin dive into the subject of credit cards, talking about what they are, why or why not to have one, and everyone’s favorite: credit card rewards. The discussion is wrapped up with the pros and cons of opening one up and Josh and Austin discussing their personal approach to credit cards. Listen in, this won’t be one you’ll want to miss!
Main Talking Points
[1:23] – What is a Credit Card?
[3:54] – How Credit Card Issuers Make Money
[8:38] – Why Use a Credit Card?
[14:46] – Why Not to Have a Credit Card
[21:10] – Dad Joke of the Week
[22:00] – Credit Card Rewards
[26:03] – Pros & Cons to Opening Up a Credit Card
[33:14] – Josh & Austin’s Personal Approach
[39:28] – What We Suggest
Links & Resources
12 Reasons Credit Cards Are Must Haves For Financial Wellbeing
Why Most Americans Should Not Use Credit Cards
Oops. I Missed a Credit Card Payment! – The Everyday Advisor
Invest With Us – The Invested Dads
Free Guide: 8 Timeless Principles of Investing
Social Media
Full Transcript
Intro:
Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.
Austin Wilson:
All right. Hey, hey, hey. Welcome back to Invested Dads Podcast, a podcast where we take you on a journey to better your financial future. Today, Josh, we’re going to be talking about credit cards.
Josh Robb:
Oh, no, careful. I feel like that’s like a thing like Beetlejuice where if you say credit cards three times, Dave Ramsey will show up.
Austin Wilson:
In the mirror?
Josh Robb:
Yes.
Austin Wilson:
Or whatever. Okay. So I’ve never actually seen Beetlejuice.
Josh Robb:
Oh, man.
Austin Wilson:
I mean, I’m a lot younger than you.
Josh Robb:
I’ve seen parts of it on TV. I don’t know if I really watch it all the way through.
Austin Wilson:
It sounds disgusting.
Josh Robb:
Yeah. It’s got Michael Keaton in it.
Austin Wilson:
Yeah. It’s from the, what, early ’80s probably.
Josh Robb:
Yeah.
Austin Wilson:
Anyway. So credit cards. Interesting. Very popular topic. Something we’ve probably-
Josh Robb:
It’s controversial in some-
Austin Wilson:
It is controversial.
Josh Robb:
… groups and what realms of this financial world.
Austin Wilson:
And we have opinions.
Josh Robb:
Yes.
Austin Wilson:
Now, these are our opinions. They are not fact. This is not gospel. This is not black and white. You cannot make it just… This is what Josh and I think.
Josh Robb:
So spoiler, when it gets down to the point where you ask, what do we think? Guess what I’m going to say? It all depends on your situation.
[1:23] – What is a Credit Card?
Austin Wilson:
It depends what you want to do. Yeah, that’s the way it works. So just take a second and go 50,000 feet. What are credit cards? What is a credit card?
Josh Robb:
Yeah. So simply, it’s a card usually plastic that offers some form of credit and that a business or entity is willing to pay for transactions right now for you as long as you promise to pay them back with a little interest later on.
Austin Wilson:
Or a lot of interest.
Josh Robb:
Yes. So the idea there is instead of you having cash in hand, you have this card. That’s in a sense somebody promising that they’ll make sure that it gets paid and then it’s their responsibility to get paid back from you. So it’s really a way of extending credit and we’ve talked about credit, when we talked about mortgages and stuff. It’s a way of just saying, “Okay. There’s this line that says, “Okay, you’re worth or you have the ability to pay this amount so we’re going to trust that and we’re going to extend that, that you can make purchases without actually having the cash in hand.”
Austin Wilson:
Yep. So to bring it back to your earlier funny joke about Dave Ramsey, why does Dave Ramsey hate credit cards? It’s because it is debt.
Josh Robb:
Yes. You owe somebody something. Now, it could be for 30 days. It could be for 10 years depending on how you pay your credit card back.
Austin Wilson:
It is not taking your money out of your checking account or cash or whatever to buy that item. You are saying, “I owe you for this purchase I’m making right now and I’ll pay you whenever either next month or overtime,” or however people decide to do that. That’s why people like Dave Ramsey are against it.
Josh Robb:
Yes. And what he recommends is called a debit card. And the difference there is a debit card actually deducts or debits out of your checking account or savings account, the money right away. So you can only put on your debit card or transact the amount of money you have in your account or else you overdraw and you get in trouble. So that’s the difference. A credit card, you are making purchases on credit meaning it’s a future obligation. Debit card, you’re currently debiting out of your cash, the expense.
Austin Wilson:
It’s really about calendarizing when that money comes out because all other things equal, if you pay off the statement balance or whatever, which we’re going to talk about later, you’re either just paying for little chunks here and there as you spend the money with a debit card or you’re not doing that, but then at the end of the month or whenever your due dates set, boom, all of it hits at once.
Josh Robb:
That’s correct, yep.
[3:54] – How Credit Card Issuers Make Money
Austin Wilson:
So I guess let’s kind of also discuss how credit card issuers make money. Because we say it a lot, but there is no free lunch.
Josh Robb:
Correct.
Austin Wilson:
So credit card companies like to make money, right?
Josh Robb:
Yes.
Austin Wilson:
These are some of the biggest publicly traded companies out there a lot of them and how do they make money? Well, first of all, they don’t make money off of everyone.
Josh Robb:
Right. So there’s actually two ways and we should start by saying, there’s two different groups of credit cards.
Austin Wilson:
Correct.
Josh Robb:
So Visa and MasterCard, you see those. For instance, if you get a card from a bank, it’ll say Visa or MasterCard on it, more likely than not. Then there’s American express and Discover Cards.
Austin Wilson:
Correct.
Josh Robb:
Those are a little different. They’re all credit cards and that your… Same like we explained, they’re paying and then you pay them back down the road. The big difference between the two is Visa and MasterCard do not take the credit risk themselves. Whoever issues the card, whether it’s a bank or whatever. Usually, it’s a bank or a store will issue a card, but it’ll have a Visa or MasterCard on it.
Austin Wilson:
Capital Ones, JP Morgan, those kind of things.
Josh Robb:
They’re the ones taking the risk, whereas American Express and Discover, while they will do that with some places more often than not, they’re the ones taking the risk. They’re the bank backing those credit cards. So American Express and Discover are actually financing it themselves.
Austin Wilson:
Right.
Josh Robb:
So there’s two different ones, and you’re right. So if you pay off your balance every month, no interest accrues. Let’s say yours is on a normal month schedule from the 1st to the 31st. Any transaction happen that time, you’ll get a credit card statement that says, “Here’s how much you owe,” because here’s all the transactions you made during this time period. You then have 30 days to pay this off and at the end of those 30 days, we’ll start charging interest. But through that time, interest-free.
Austin Wilson:
Right.
Josh Robb:
So in a sense, you just… It will be the same as paying cash except for your… Like Austin said, you’re letting it lump into that one payment at the end to one person. So they don’t make any money off of interest from you.
Austin Wilson:
Yeah. But what these companies are banking on… Huh.
Josh Robb:
Banking.
Austin Wilson:
See what I did with banking. Aside from the fact that, some of them do have like fees. Every year you have to pay-
Josh Robb:
Annual fee.
Austin Wilson:
… an annual fee of $100 or 200. Some of them are expensive, some of those American Express cards or whatever. But that is one way that these card companies can make money. But another is that taking into consideration that a lot of people aren’t going to carry a balance, they’re going to pay it off every month and not get charged any interest. They have to take that into consideration, but they’re counting on the fact that more people are going to carry a balance and that these people are going to accrue interest every single month and that that’s going to outweigh the benefits that they’re giving you in terms of rewards. And what they’re going to be not getting any benefit from those people who just use it and pay it off.
Josh Robb:
Yep. And on top of that, there’s also transactional costs that these people get. So if I go to the store and I use my credit card and make a transaction, if it’s a MasterCard, MasterCard gets a small fee from the store to process this transaction and it covers expenses and all that stuff that they do. So they make money on the other end. So even if I pay zero interest on a credit card that I have, they still make money from me, but not directly from me, but through me using that card as transactions, but it’s paid through by the store.
So that’s why a lot of times stores will have a minimum to use a credit card because they know it’s going to cost me this much dollar, so in order to make it profitable for me, you’d have to spend more than five dollars here to use a credit card, or whatever they do.
Austin Wilson:
Yeah, exactly. And I think that that’s something to… So it’s easy to think that hey, you’re not paying for that, but you really are because prices are then just probably a little bit higher-
Josh Robb:
They build it.
Austin Wilson:
… to cover that. It’s definitely not completely free. The numbers that I’ve heard is 1 to 3% or something like that depending on how big your company is, you can get better rates and stuff like that, but that’s what’s difficult.
Josh Robb:
And which one to use. So you have Visa, MasterCard, Discover, American Express. So there’s four networks right there. If you want all four, you’re going to have to negotiate each one. And that was part of for a while why you went to store. Maybe they only had one or two of those based on what rates they could get, somewhere just not worth it.
[8:38] – Why Use a Credit Card?
Austin Wilson:
And this does not even can take into consideration things like Stripe or whatever, where that’s a conglomerate where you can sign up for that service, use their little hardware and you can use all of these things, and then you pay them a fee which then they pay a fee to all of these different providers. So all kinds of things there. So Josh, why would someone want to utilize a credit card perhaps?
Josh Robb:
Yeah. So there was a good article out there from moneyunder30.com which we’ll link in the show notes and they listed some reasons why they feel-
Austin Wilson:
They make money under 30.
Josh Robb:
Under 30. I’m not. So I can’t read this article. They listed some ideas and a match where Austin and I were thinking, so we’re just going to go through those. One is it helps you build credit. So we’ll do a future episode about credit scores in general and what those are and what you need to know about them. But credit is used, again credit card, credit is just the ability how much money you can borrow or have out outstanding based on your income and your history.
So building your credit history is important. It shows that you do have the ability to pay back and you consistently do that. So a credit card is actually good and that it does build a history because you owe somebody money whether it’s just for 30 days or however long. And if you can pay, make sure you make monthly payments, make sure you don’t miss a payment, you actually build positive credit.
Austin Wilson:
Yeah. And that can help you down the road as you’re looking for… Maybe you want to buy a house. Maybe you want to buy a car, whatever those are. Not that we’re saying take out a car loan, but the house is a really good example of if you have a better credit score throughout a variety of factors, which again we should probably do a full episode on credit scores. But you will get a better rate, better terms and stuff like that. So very favorable.
Josh Robb:
Whereas we mentioned the debit card is the alternative way of making electronic purchases. Debit card does not build credit, because you’re not borrowing. It’s your money when you make those transactions. Another reason-
Austin Wilson:
That would be called a debit score?
Josh Robb:
A debit score, yeah, I guess is what you can owe. It’s what you can pay. The next thing is credit cards offer rewards programs or cashback, some sort of incentive to use their card. They’re competing against other credit cards out there. So they have programs to entice you to use them. So it may be a rewards that you accrue points whether it’s miles for airline tickets, points for all these different… Maybe they give you a brochure or pamphlet of all the things you can order or in a lot of cases just straight cashback. So if you get 2% cashback every transaction, 2% of that is returned to you as a form of… You can reduce your monthly, what you owe or in a sense, straight cashback.
Austin Wilson:
Yeah, exactly. Another reason that both individuals and businesses, the businesses is one that comes to mind, it’s really simple is that this is one easy way to track your spending in one place. So you don’t have to log into your bank and then go through… Oh, I’ve got all of these checks that were sent out and then I’ve got my mortgage ACH transaction. I’ve got yada, yada, yada, and then find your actual transactions. Nope, it’s all right there and a lot of credit card providers have very cool apps and things within their website even where it can categorize and help you see things.
Josh Robb:
Yep. And that’s huge when you’re looking at your budget. How much did I spend on food? Well, if you use your credit card for food and other expenses, you can break down, “Oh, I used X percent of my total spending was on groceries,” or whatever like that. So it’s very helpful when it comes to budgeting to say, “Okay, where am I spending my money and how much is going to each spot?”
They do offer additional protections. So credit cards, and I encourage you if you do have a credit card, look through all these different things that it offers. A lot of people don’t take advantage of them. So purchase protection, that’s huge. So if I have a three-year warranty, but my credit card offers an additional year, I get another year just for using a credit card to make the purchase.
It also is helpful. Let’s say I did not purchase something and it shows up on my credit card, it says fraud, they offer protection program along with that as well. Because again, there that in between, you’re repaying them and they’re the ones that they’ll make it right with the company, the other store, whoever, where that fraud happened.
Austin Wilson:
Particularly with those things, it’s much easier to reverse some of those fraudulent charges or whatever with a credit card than it is with a debit card because with a debit card, if someone-
Josh Robb:
Your money is gone.
Austin Wilson:
Yeah. If someone hacks your account and spends $2,000 on a new TV, your checking account has 2,000 less dollars in it and that’s a lot.
Josh Robb:
You may eventually get it back, but it may be a while and you’re going to need that.
Austin Wilson:
But with a credit card, boom, they can just flip a switch and it’s gone before you even get a bill so that’s kind of nice.
Josh Robb:
On top of that, insurance. So again, depending what your credit card is, they may offer travel insurance. So let’s say I book a vacation, my credit card, if I use that may offer additional insurance protection for… If I can’t make it or something happens, and then along with that if I’m overseas, they have certain insurance plans in place just through my credit card, I don’t have to get additional insurance packages to cover it.
Austin Wilson:
So like when The Invested Dads record a live episode from the beach in the bahamas?
Josh Robb:
We’ll have to use your credit card if we have any to-
Austin Wilson:
We’re going to use credit cards to get our-
Josh Robb:
… make sure we get all of our insurance protected.
Austin Wilson:
Another benefit is that generally speaking, nowadays, they’re accepted pretty much everywhere. Even small businesses have great access to be able to accept credit cards. Most major, like we said Visa, MasterCard, American Express, Discover, those are pretty much accepted everywhere.
Josh Robb:
Some places will not take a debit card. So if you think of hotels in particular. Some will take debit, but they’re going to place a hold. It’s in a sense in case you destroy their hotel room, they’re going to put a larger block on your card again because that’s your money, they know that’s their only chance of getting it back. Whereas with a credit card company, they have the ability to negotiate and work through that. So a lot of places they prefer or only take a credit card as a way of booking.
Austin Wilson:
Yeah, anything where holds or deposits are, it’s definitely much easier with a credit card. And returns. When you return something on a credit card, it is much faster and it’s just a much more smooth process where a lot of times that can be taken care of before it even hits the statement and it’s just a wash where it takes a lot longer when you’re actually dealing with someone’s checking account through a debit card.
[14:46] – Why Not to Have a Credit Card
Josh Robb:
Yep. Let’s flip it. What are some reasons not to own a credit card?
Austin Wilson:
Yeah. So there was also a cool article on moneycrashers.com, which we’ll also link in the show notes. They have some opposing views on this and some that we would agree with as well. So number one is there is a concern about overspending because it’s really easy to just go swipe card and if you don’t have to see it come out of your checking account or whatever, you can let things rack up and you don’t… If you’re not getting in the app all the time to look at your credit card, whatever, it’ll just keep going. And then you’ll get hit with a big huge bill.
Josh Robb:
Yes.
Austin Wilson:
So that is a concern and that’s one of the reasons that Dave Ramsey is not a fan of this is the ease of spending with credit cards has really made overspending really easy because you’re just less attached to your money. Whether that be debit and you see it come out of your checking account or that be hard cash where you’re like, “Oh, do I really want to spend that?”
Josh Robb:
Yep. And a debit card, you stop when you run out of money. You could try debit card and if you’re out of money-
Austin Wilson:
They don’t reject you.
Josh Robb:
… it says no. It says no. Whereas a credit card, it’ll keep going until you hit your limit and most credit card companies their limit is pretty generous. They want to make sure… Obviously, it comes back to the credit score and where you’re at, but most of the time if you look at what your credit limit is, it’ll be higher than you probably want to spend in a month whereas you could just keep going, they’re not going to stop you until you hit that.
Austin Wilson:
Another one is that because… So if you think about things like a car or a house, these are tangible assets that generally hold their value somewhat well. There’s depreciation on cars, but typically appreciation on houses. So rates, when you borrow to buy these things, can generally be pretty low relative to a credit card like we’re talking about here where the credit card company, if you go buy, you go buy a $5,000, 100 inch flat screen TV for your basement. You get to watch Trolls in 6K.
Josh Robb:
That would be awesome. That’s right.
Austin Wilson:
So you do that and the credit card company is not going to come and take your TV if you don’t pay your bill. You’re just going to keep accruing interest and then they’re going to… They don’t have hard assets. They’re not going to go back on hard assets, that’s what I’m trying to say. So that’s why the interest rates are a lot higher. And those interest rates can be huge.
Josh Robb:
They’re in the 20s. I mean, they’re mid 20s in itself. It’s a lot.
Austin Wilson:
So if you think about how interest is calculated, it’s similar to other ways, the interest calculator. But if your APR annual purchase rate is 25%, then you’re getting charged every month one-twelfth of 25% on your outstanding balance.
Josh Robb:
Which is a lot.
Austin Wilson:
That’s a lot.
Josh Robb:
It grows fast.
Austin Wilson:
We love compound interest, but that’s when you’re growing your money.
Josh Robb:
In your favor, yes.
Austin Wilson:
But when it’s compound interest on debt…
Josh Robb:
Nope.
Austin Wilson:
I’m shaking my head.
Josh Robb:
Yeah. Credit card statements usually will show you, but if you ever look to see how long will it take if I only pay the minimum because again that minimum is not paying off your balance, it’s just the minimum amount they’ll accept to keep you current. And that is usually seven, 10, 12 years down the road before you pay that amount off. Not counting any new stuff you’d put on that card.
Austin Wilson:
Think about how expensive that TV could get if you don’t pay it off right away. You’re going to be paying just like your house has multiples because of the interest. You can have multiples of the things you purchase because of interest.
Josh Robb:
And that really is the biggest reason not to have a credit card is they’re not looking out for your financial well-being, because they’ll make money as you struggle to get back on firm footing. That’s the biggest downfall for credit cards is they’ll continue to grab that interest and they are not going to be too concerned about it because you agree to this contract and they will continue to charge you as long as they can.
Austin Wilson:
Yeah. So it’s just good to know that there are other options to pay. It depends on you how you are is probably what it boils down to and we’ll talk about that in a little bit. But just know there are other options.
Josh Robb:
Checks which are awesome.
Austin Wilson:
Oh, don’t.
Josh Robb:
Sit down and write a check out in the convenience line while people are behind you watching.
Austin Wilson:
So balancing a checkbook. Have you ever done it?
Josh Robb:
Like on my head or…
Austin Wilson:
No. Like in the back of the book.
Josh Robb:
Like make the numbers work? Oh, okay, yeah.
Austin Wilson:
You’ve done it.
Josh Robb:
Oh, yeah.
Austin Wilson:
You still do it?
Josh Robb:
So true story, I used to help my grandma balance her checkbook after my grandpa passed away and I’d go over and reconcile it all for her. But she did everything. For me, I use online banking. That’s the way. My actual checkbook does not have continuous balance.
Austin Wilson:
What has all the blank pages at the back that you never use.
Josh Robb:
So I do use the ledger where when I write a check, I track all that, but I don’t follow through with the current balance because nowadays with debit cards and all that, more money comes out than that’s showing in that ledger. So it’s just to reconcile that would be a pain.
Austin Wilson:
This was a few years ago and so I was talking to my mom and I was like, “Yeah.” I just ordered some new checks and she said, “Hey, how often do you balance your checkbook or something?” And I was like, “I have never balanced my checkbook.” Because I log in, maybe not daily but very, very frequently to my checking account-
Josh Robb:
Just check on things.
Austin Wilson:
… to see what’s going on. Nowadays, with ACH transactions and automatic bill pay and those kind of things, I know what’s-
Josh Robb:
Is that the affordable care hat?
Austin Wilson:
The affordable care hat. Oh, Josh, you made me mumble. So Automatic Clearing House. Is that right?
Josh Robb:
Yeah.
Austin Wilson:
Automated Clearing House?
Josh Robb:
Maybe. Is that the one where they had that prize that you do. No, that’s the Publishing Clearing House.
Austin Wilson:
The big check, a big fat check.
Josh Robb:
A big giant check.
Austin Wilson:
So I was like, “Mom, I’ve never balanced my checkbook but I’ve never missed anything because I log in so much and I know what checks are coming.” I mean, I write checks when I go to the BMV because if you use a card, you get charged more.
Josh Robb:
You do.
Austin Wilson:
I physically write checks for… That might be it.
Josh Robb:
Like our trash pickup service was check only and they’re just now switching to automatic which I’m pretty excited about.
Austin Wilson:
We bank through Huntington and they have automatic bill pay. It mails a check for you.
Josh Robb:
Yep, so I do that. I do that for a couple.
Austin Wilson:
I started using that for it. So anyway, that’s checks. That’s a sidebar on checks. But Josh…
[21:10] – Dad Joke of the Week
Josh Robb:
Back to credit cards.
Austin Wilson:
Credit cards.
Josh Robb:
Is that what we were talking about?
Austin Wilson:
Well, I think you’re about to make me laugh.
Josh Robb:
I am. All right. So speaking of all that, do you know why bulls are very bad with debt>
Austin Wilson:
I have no clue.
Josh Robb:
Because they always want to charge it. That’s my joke.
Austin Wilson:
I don’t get it.
Josh Robb:
Bulls are always charging at things, but they’re charging it as in putting it on… So it’s a credit card joke, but it’s not the best.
Austin Wilson:
Josh, I was thinking of like a cereal bowl.
Josh Robb:
Oh, I’m sorry. I should clarify that. Let’s redo the dad joke.
Austin Wilson:
No, no.
Josh Robb:
No, you don’t want to? I could just say the animal, the bull or the cow, but the bull is the one that charges.
Austin Wilson:
I was like-
Josh Robb:
You’re like why is the bowl, a cereal bowl want to charge anything?
Austin Wilson:
It’s funnier when you explain it.
Josh Robb:
When you know it’s a bull, as in an animal then you understand. They’re charging.
Austin Wilson:
That males a lot more sense. All right so credit cards.
Josh Robb:
I failed on that dad joke.
Austin Wilson:
Charging.
Josh Robb:
Charging.
[22:00] – Credit Card Rewards
Austin Wilson:
Yeah. So rewards are a huge reason that people use credit cards.
Josh Robb:
I would venture to say if there wasn’t rewards…
Austin Wilson:
Why would you use it?
Josh Robb:
Why? Besides the protection piece, which now a lot of debit cards will have some sort of protection built into it. They’ll have like some sort of… For instance, my bank, I have someone that I can contact if there’s a problem. They’re usually pretty quick to at least freeze it and start the process, but you’re right it. Between instantaneous and a couple weeks it matters. But the rewards is the big appeal for credit cards.
Austin Wilson:
Right.
Josh Robb:
I mentioned cashback, miles, points.
Austin Wilson:
Sometimes discounts.
Josh Robb:
Discounts. That’s usually on top of, as well. They’ll give you an additional thing. So what do you think? Of those lists, cashback, miles, points, which one is most appealing to you?
Austin Wilson:
Cashback.
Josh Robb:
You like the cashback?
Austin Wilson:
For sure. And we’re going to talk about how we on our families manage this later on, but that’s the biggest one that I use. What about you?
Josh Robb:
Cashback is huge because it’s just straight dollars in your pocket.
Austin Wilson:
I like dollars.
Josh Robb:
But for us, miles is… I do… Well, we’re talking about it, but I do have a Delta credit card and those miles are great when we’re buying tickets to fly. I have four kids, so that’s six people flying. It can get expensive. So to cut down that cost is huge. And if you use Delta then, I’d have to pay for the checked bag. So then every single one of my kids can have a checked bag and I’ll have to try to jam it all in and save on that.
Austin Wilson:
So that means your kids each get their carry-on, you get your carry-on and then Steph can bring whatever she wants.
Josh Robb:
That’s right. Yes.
Austin Wilson:
That’s the way it would go in my family anyway. It’ll be like Juliana-
Josh Robb:
She gets all her suitcases.
Austin Wilson:
… and I would have a little carry-on bag then Jenna…
Josh Robb:
We went on a trip and we drove, but it was like I had a small carry-on suitcase. Kids had small carry-on suitcases and then Steph had a giant suitcase. “We’re going to the beach. Give me your swimsuit and towel.”
Austin Wilson:
I know. Out of a carry-on bag, I can live for two weeks.
Josh Robb:
Yeah, it’s crazy.
Austin Wilson:
And I hate baggage claim.
Josh Robb:
I used to not mind until we lost our luggage on a trip that was-
Austin Wilson:
I remember that.
Josh Robb:
Oh, man.
Austin Wilson:
Baltimore or something?
Josh Robb:
We went from Detroit to Baltimore. So it’s a short flight, but we had free-
Austin Wilson:
It’s like an hour.
Josh Robb:
We had a free flight, so that’s where we went to a football game. But we lost our luggage on that flight and it took us two days before it landed back. When we were heading back home, it was back in Detroit for us. But our bags went to Florida, Orlando. It went to Disney World.
Austin Wilson:
They got a vacation.
Josh Robb:
It went to Disney World and back before we saw them again.
Austin Wilson:
Oh, that is funny. So there are some other features that credit cards also offer in addition to what we’ve already talked about. Number one is promotions so to get you on board, a lot of credit card companies will offer you some large cashback bonuses or like, “Hey, if you spend $2,000 in the first two months or whatever, here’s 100 bucks or something like that.” That’s cool sometimes if you were already in the market, but that can… These are all ways to entice you to either spend more than you need or to just sign up for their business anyway. So you have to see it from… It’s a sales pitch.
Josh Robb:
Yes.
Austin Wilson:
Another one is a lot of companies, and I’m not condoning this, but a lot of companies offer rollovers where you can bring another balance from another card onto their card and you’re going to pay a small fee in terms of percentage on that. And there can be a period where that’s interest free or whatever. This can actually be used for good if you have a high interest credit card that’s accruing a bunch of interest and for a 3% or whatever, you can roll the balance on to a 0% for 24 months or something.
Josh Robb:
Someone will do it for free now too.
Austin Wilson:
Oh, really?
Josh Robb:
Yeah, with no fee they’ll accept balance transfers for no cost and then you can get like an introductory period where it’s zero or low interest.
Austin Wilson:
So that may be worth looking into. It’s not a habit. That’s probably good to…
Josh Robb:
No, but if you’re in that spot, check around that you may be able to get at least a temporary reprieve from that accruing interest at a high rate.
[26:03] – Pros & Cons to Opening Up a Credit Card
Austin Wilson:
So we mentioned credit scores earlier. Now having, using, paying off, opening credit cards, these actions can all have impacts on your credit score. So there’s pros and cons, right? This can go both ways for you. So Josh, what are some pros to having or opening up a new credit card or whatever?
Josh Robb:
Yes. So the pro from a credit score standpoint and looking at it is you have more available credit now. So a credit card, let’s say they give me a $5,000 credit limit. And so I can now have this credit of $5,000. So a positive for it is it will build my score overtime is if I’m consistently paying off and have no late or unpaid balance on there. So that’s great of it.
On top of that is that $5,000 amount is looked at okay, if he can manage that, maybe he can manage more. And it could build your credit score up and build your available balance up as well. So that if you need it then, let’s say down the road you say, “I know I’m going to be remodeling my house and so if I can get my available credit up to 10,000, I’ll be able to do this whole remodel and I know I’ll be able to pay it off and I can negotiate.”
Some now allow you to build like a payback plan where I know I’m going to have a bunch of expensive roads, I can group it into one cost and then I’ll negotiate or have a deal with my credit card company and say, “Okay, just this amount here, can I pay this over a certain amount of time at X percent interest?” Or somewhere even now often zero percentages again like a plan. So then you can really essentially utilize that credit that you have available.
Austin Wilson:
Yeah. The key there is the credit utilization versus available credit. So creditors want that to be… When they’re signing up, you want that to be low. And it being low, would be beneficial for your credit score. So if you have between all your credit cards or whatever and all your outstanding available credit, $10,000 of available credit, if you are using up 3,000 per month, you have 7,000 left over. Well, if you then get another card and you can add another 2 or 3,000 on top of that, without really using more then your available credit goes up and your utilization rate goes down, which is a very beneficial score there.
Josh Robb:
Which is good.
Austin Wilson:
But there are downsides-
Josh Robb:
Yes, there are.
Austin Wilson:
… to credit scores to how credit cards can impact your credit score. So first of all, you get dinged on your credit score when you open too many new accounts or you have inquiries into your credit score.
Josh Robb:
Most inquiries don’t impact your score. It’s when you actually process and open it.
Austin Wilson:
Gotcha.
Josh Robb:
Let’s say I go to a car dealership, I’m looking to buy a car and just as part of their process, they do a quick credit check on me. Those type of things have zero impact because they’re just inquiring hey, where are they at? But if I go through the process-
Austin Wilson:
Actually application.
Josh Robb:
Yeah. The application itself is where you’ll get hit. If there’s especially multiple ones in a row, that could say, “Okay, if all these come true, there’s going to be a lot of pressure put on that utilization and you could be in trouble.” So that will impact your score.
Austin Wilson:
Another thing is average length of account. So one thing that goes as a factor into your credit score is average length of credit established and if you open up a new account, then that is a new account that is really, really short. So that lowers your average length of your credit. And what I would caution against is even if you open up a new account and you close an old one, that closed old one is going to do the opposite too. They’re going to shorten it as well. So you could double ding yourself and creditors, so people who are issuing credit want a lengthy period of credit establishment.
Josh Robb:
We talked about this in the college podcast where we talked with a college student, Maddy. We talked about one of the things as a young person heading into the world is if you want to build credit, this is an easy way to do it. Most of the time, you can qualify for a credit card as long as you have income. More often than that, you can get some sort of credit card. So getting one and just putting a couple transactions on there just to get the credit history started is useful if you think you’re going to need that credit down the road.
Austin Wilson:
Yeah, keep it simple. So if you are just getting started, maybe look at what your options are for credit cards that are out there. Find something that has some maybe attractive perks or whatever.
Josh Robb:
But free.
Austin Wilson:
But free. But do something simple like, “Hey, I’m going to put my gas on this only.” And that gets you in the habit of it’s going to be paid off all the time. The tip, and we’re starting tips section here.
Josh Robb:
Yes, this is it.
Austin Wilson:
Here’s the tip. Biggest tip. Set up auto pay for your monthly statement balance so you never ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever pay interest.
Josh Robb:
When should I pay interest?
Austin Wilson:
Never ever, ever, ever, ever, ever, ever. Never pay interest.
Josh Robb:
Nope. Set it up, auto pay.
Austin Wilson:
Yep. That’s not optional. You have to do it.
Josh Robb:
Most credit cards with all their fund online and apps, it’s pretty easy to… If you link a bank account and you say, “Okay, here’s my statement date. Here’s what I want to pay.” Pay the full balance or their statement balance, call it a day.
Austin Wilson:
Exactly. Also, fun tip is just keep mindful when you’re at the store or when you’re spending using your credit card because like we’ve said, it’s easy to spend more money because you’re not seeing it come out of your checking list.
Josh Robb:
If you hand dollars over, you see those leave and they leave you and go to the other person. When you use a credit card, it just doesn’t seem as real.
Austin Wilson:
Exactly. So be mindful of what you spend. Also, know when the payment will get drawn or withdrawn from your checking account. So know that every month on the 22nd, my credit card bill goes out. And this really becomes important if you have more than one knowing all the time when those come out and making sure that you have the income or the cash flow to be able to consistently provide for that.
Josh Robb:
Correct.
Austin Wilson:
Josh, one more tip.
Josh Robb:
Yes. Set up auto payment.
Austin Wilson:
What?
Josh Robb:
Wait that’s the same as the first one. But it’s so important, we’re going to make it another one.
Austin Wilson:
It’s so important.
Josh Robb:
It’s really just we can’t stress this enough. The biggest impact on your credit, on the interest rate and everything is missing a payment.
Austin Wilson:
Don’t do it.
Josh Robb:
Don’t miss a payment.
Austin Wilson:
There’s no reason.
Josh Robb:
Nope. And if you think you might, then maybe you’re not ready for a full credit card. Stick with the debit card.
Austin Wilson:
Stick with the cash.
Josh Robb:
Because the impact long term… By the way, Jess wrote a blog on the Everyday Advisor about this and she talked about the one time she had an issue like that and just the process to get back from there. She was honest and open about, “Here I am as a financial advisor and something happened.” If you want to read it, it’s a great blog post. We’ll note that in the show notes as well. But if you’re worried about that, if you have inconsistency with doing that and you, for whatever reason don’t want to send it up to do it automatically monthly, or you can’t. Maybe you have an inconsistent revenue income stream from your job, then maybe stick with the debit card cash for now.
[33:14] – Josh & Austin’s Personal Approach
Austin Wilson:
And that’s kind of an overarching theme is that credit cards can be a useful tool, but they take a bit more discipline on the front end and ongoing even to do it right. Now, they can have some benefits and do well for you, but you do have to be a little bit more mindful where if you’re only limited to what you’ve got in your checking account with your debit card, then that’s it. That’s what you got. So just a little bit more discipline might be involved there. So Josh, what do you do personally with you and your family?
Josh Robb:
Yes. So we have two main credit cards and I guess to start with, my brain works in buckets and so I like to put things in groupings and that’s kind of how I work. So we have two primary credit cards. One that’s used for our reoccurring. So utilities, anything that’s reoccurring bills from insurance all the way through anything that I can set up automatically that will accept a credit card is on one credit card and it gets paid off every month. That’s just a way that I track that grouping, so I know how much I’m being spent on those recurring costs.
Then we have a second credit card that is used for our more discretionary stuff so gas and groceries and those type of things and that has a cashback or a percent back on grocery. So you utilize the card for what it’s good for. But then that one has more of a variable in the balance because it just depends on what we do that month and so that’s kind of how we track those two. And then I just opened, thanks to Austin and I talking, he gave me this recommendation, Amazon has a credit card and you get-
Austin Wilson:
5%.
Josh Robb:
… 5% back on Amazon purchases. It’s crazy. We just opened it, but we do a lot of our shopping on Amazon and we do some of that whether where they deliver the home or what… I forget the Amazon Prime. What’s the-
Austin Wilson:
Prime Wardrobe.
Josh Robb:
Not the wardrobe like the groceries, fresh.
Austin Wilson:
Oh, subscribe. Yeah, yeah.
Josh Robb:
The subscribe things. Just subscribe and save or whatever. There’s certain items that just get delivered. We have dog food and a couple things that get delivered. So just automate that, but we’ll get 5% now. It’s just saving some money. But again, with the intent to pay that off every month. Then finally I realized because when we were talking about this thing, I went back and looked. We have Kohl’s which is a credit card. They’ll talk like store cards, but that’s credit card.
Austin Wilson:
That’s a credit card.
Josh Robb:
So we, again, use that because you get Kohl’s cash and whatever.
Austin Wilson:
Specials. Yeah, exactly.
Josh Robb:
And again, it’s the kind of idea where ideally you say, “Okay, I have all the cash right here for my purchase whatever at Kohl’s. I’m going to use the card.”
Austin Wilson:
And get a discount.
Josh Robb:
You can actually go, after you buy.
Austin Wilson:
Pay it there. I know.
Josh Robb:
Walk it to the back of the store and pay it and then walk out and you’re done. So you utilize those type of things. Take advantage of what they offer to get the best benefit and best deal, but just be mindful and wary. If I get to the point where I’m worried about any of those, they’re gone and I’m going to do something else.
Austin Wilson:
Exactly.
Josh Robb:
For now that’s where I’m at. What about you, Austin?
Austin Wilson:
Similar. I’m a bucketer, I’m a cashback maximizer is the way I view it. So we have all things set up to pay the thing off every month. That’s the way we roll. But we have probably like three main cards that we use and I had to get my wallet out.
Josh Robb:
All right. Get your wallet out.
Austin Wilson:
So we’re Costco members.
Josh Robb:
Costco.
Austin Wilson:
So we have the Costco Visa and the Costco Visa we like because on gas, we get like 5% cashback. In our restaurants, we get 3% cashback so that’s for gas and restaurants. Then we have an American Express something cashback thing which gets 5% on groceries.
Josh Robb:
There you go.
Austin Wilson:
We’re getting up there in cashback. Then we have a Capital One Quicksilver which is one and a half percent cashback on. And we use that on miscellaneous things that it doesn’t fit other buckets. Then we do have the Amazon card because we order a lot of things on Amazon. And 5% is a lot.
Josh Robb:
That’s savings.
Austin Wilson:
You cannot say no to 5%. Then we also have… I mean, we have our Apple cards because we’re Apple gurus and we use that to get… for all of our Apple services and when we buy Apple products, we can get better cashback from Apple.
Josh Robb:
There you go.
Austin Wilson:
So it’s cashback maximization. It’s a mouthful. I truly feel there’s no right or wrong way to do this because I feel like sometimes I do a lot of work for the cashback when… I don’t know. Maybe it’s worth it, maybe it’s not. I like the cashback. It’s free money. But we’ve gone back and forth, probably a couple times since we’ve been married where we’ve got these credit cards which we do exactly this and we maximize our cashback and it’s great. And then we’re like, “I’d like to not have those big swings when the bills come due.” And we just go with debit card only for a while and then we’ll be like, “I want some cashback again.” And we’ll start doing the credit cards again. I think both are good. I really think both are good and it depends on where you’re at in life.
Josh Robb:
And it depends on budgeting too. So I know for my wife and I, doing actual cash in envelopes where you say, “Okay, this is how much I want to spend on groceries. This is how much you want to spend on entertainment,” or whatever and you actually put physical cash in each of those envelopes and then when you’re going to do it, that’s what you use. It makes you so mindful of what you’re spending and it makes you say, “Okay. There’s only $20 left in this and I got to get two more weeks worth. Is this really worth it?”
Whereas if you had a credit card, you probably wouldn’t even know it, for one and then two, it’s a lot easier to say, “Well, I’ll be all right because I can borrow from next month or whatever.” So actual cash is great for budgeting. So we’re the same ways depending on where we’re at, what’s going on. Sometimes it just makes more sense to slow down the credit cards and switch to something different. But I’ll tell you from first-hand knowledge, if you really do struggle with the budgeting and the spending aspect, cash is king because even with the debit card, you can lose track of where it’s at and be spending something else that needs to be there for later.
You’re not going to say, “Well, I still have 200 left in my checking account.” But what if you have a hundred dollar bill coming from utilities and there’s not enough left. So cash to me is huge. So if you are struggling, that’s where I would suggest, at least start with and go there until you get a better consistency and I have leftover money at the end.
Austin Wilson:
I’ll be the first to admit, I think we probably do spend a couple dollars more having credit cards because it’s easier. If I’m at the grocery store and I’m literally forking out 20 bills for my $100 grocery trip or whatever, I’ll probably be more apt to put something that I just threw in the cart back because I’m paying cash. But if I bought my card, that’s all right.
Josh Robb:
Just get it. It’s all right. Yep.
[39:28] – What We Suggest
Austin Wilson:
So I think it really comes down to everyone is different. So I guess that’s the question. So what do we suggest people do?
Josh Robb:
Well, like I said in the beginning, it really depends on your situation.
Austin Wilson:
Or you can do both.
Josh Robb:
You can do both. What it comes down to is credit cards are convenience and that’s really what they’re designed for and why they exist is that they do offer very good convenience. If you’re going to struggle with those other things that we talked about especially the spending and the budgeting, I would just say hold off on credit cards. If you need credit or need to build credit, it’s in my opinion the easiest way to do it. There’s other ways to build credit, but this is an easy way to do it.
And then again, if you’re worried about protection whether it be someone stealing your identity or whatever, credit cards do offer an extra layer of protection as well as purchases and those type of things. So again, it comes back to where are you at in your life situation, how are you with handling finances and then decide from there.
Austin Wilson:
Yep, awesome. Well that’s credit cards for you. As always, check out our free gift to you. It’s a brief list of eight principles of timeless investing. It’s on our website. It’s free. These are some overarching investment themes meant to keep you on track to meet your long-term goals. Check it out. Josh, how can people can support us and help us to grow this podcast to continue to bring these episodes out each week?
Josh Robb:
Yep, make sure you subscribe. That alerts you whenever we do a new podcast every Thursday.
Austin Wilson:
Thursday.
Josh Robb:
And then also Apple Podcast, if you listen on Apple…
Austin Wilson:
Which most people do.
Josh Robb:
A lot of people do. That’s a great way to help us rank higher. Ranking higher just helps us reach more people.
Austin Wilson:
So leave a review on that.
Josh Robb:
Yes. So reviewing on Apple Podcast is huge. Email us any ideas you have at hello at theinvesteddads.com. You can get there also from our website, theinvesteddads.com. We love responding to questions or ideas. That’s what we love talking about.
Austin Wilson:
Yeah, absolutely. And if you found this episode particularly interesting or if you’ve had some interesting discussions about credit cards with family or friends, just hit that share button and share this episode with them. Maybe they can learn something as well.
Josh Robb:
All right. Thank you. We’ll talk to you next week.
Austin Wilson:
All right. Thanks, bye.
Outro:
Thank you for listening to the invested dads podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review. Click subscribe and don’t miss the next episode.
Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast.
There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index, would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.
