Canadian Finance Blog

Posted: 02 Sep 2010 02:00 AM PDT

"This is not your money, it never will be."

That was my thought as I opened the envelope and pulled out my first credit card back in 1993 – just a freshman in college. I was excited because I had a new way to purchase things – it was your basic no frills credit card with a $500 limit and no rewards or special features. I had watched my parents using credit cards time and time again growing up and I felt like an adult, even though I wasn't.

From the beginning I was never disillusioned by the fact that whatever I purchased on this card had to be paid back right away – otherwise I was paying for much more than what I'd purchased. The credit card company would be making bank off of me with their devilish APR scheme. No way, Jose, that's not the game I wanted to play – I decided then and there that I won't be one of those people that gets sucked into the depths of credit card debt.

I never saw my credit card as "free money" or even "money to be paid back later" like so many of my friends. Why? Because the money I'm paying isn't going towards an asset. Even as a liberal arts student I understood this – most likely because my grandfather was an IRS man, and my mother an accountant. Their money management mindset seeped into my brain over the years. Back then, I saw the credit card as a device to build my credit history up – plain and simple.

As the competition in the credit card industry has grown over the years since I had my first card, companies have come up with ways to entice new customers with features that you can really take advantage of, if you use your credit card the right way.

Primary Rule: You Must Pay Off Your Card In-Full, Every Month

This will be a tough change for you at first if you aren't in the habit of doing this already. As human beings, once our habits get set in stone, they can be very difficult to change. But fear not, there's a plan here to help you get this accomplished.

If you are carrying balances every month, you're definitely going to have to make some lifestyle changes. You're going to need to cut back on luxury expenses, and find ways to save money. You'll need to budget your money tightly and think only in terms of spending cash first. Negotiate your interest rates as low as possible, and balance transfer to lower or no APRs if you have to.

You'll need to stop using your card for a while, until you've paid off all of your balances. That's right, I said it – all of your balances. I don't care how long it takes, 1 month, 1 year, 5 years. You need to go cold turkey – until you change your bad credit card spending habits. You might want to negotiate credit card debt by looking into debt negotiation services, but you certainly can do this on your own.

Think of any spending you do with your credit card as spending cash electronically – but only after you have zero balances on your cards. Do not, however, cut up your cards, we need to keep them open for when you are paid off. That's a bit extreme.

If you are carrying small balances then obviously you have less work to do, but I still advocate not using them until you are at zero balance on every card you have. I recommend having two cards maximum per person.

New Mindset: A credit card is a device for building credit, building rewards points, having purchase protection and emergencies. If you already have this mindset, then perhaps you'll learn here about some extra features available to you.

Ok, let's get into all of the benefits you can reap – now that you are using your credit cards the right way.

Use #1: Build or Improve Your Credit Score

The great thing is you'll be raising your credit score in the process of paying off your balances. You'll get better rates on mortgages and any other loans you might apply for. Of course you'll get better APRs for your credit card, but honestly you don't even need to think about that if you are using credit cards the way I've outlined. I don't even know or care what my APRs are, because I don't miss any payments. By the way, I only have two credit cards – a primary and a backup. I used to only have one card, but when I got defrauded on that card, then I didn't have a backup to pay my outsourcing workers while my primary card was replaced.

On that note: remember to never miss a payment even if you do pay balances in full every month. You're losing money with the late fee if you miss a payment, and paying interest – just like if you were still carrying balances. Yes, you can request that the late fee be removed and the interest rolled back – your company most likely will do it if you have a solid payment history, but don't make a habit of it. This is where auto-payment is a good thing. I still do manual payment because I like to have more control just in case of emergency, and I setup reminders to tell me when to pay.

Use #2: Purchase & Price Protection

One of the main benefits of having a credit card is purchase protection. You can contest the charges if there's an issue with a vendor, and you have loss, theft and damage coverage for a term after the purchase, up to a certain amount for item. You also have no liability for unauthorized purchases (I used this when I was defrauded), online or offline.

Use #3: Gain Reward Points for Free Stuff or Cash Back

This is exactly why you want to do as many transactions as possible on your card. Most every company has a rewards program, and I recommend a card that is flexible with point spending (not just travel dedicated) or a cash back card. I currently have the Chase Sapphire (rewards points) and Chase Freedom (cash back) cards, of which the Sapphire is my primary.

This is not an excuse to spend extra money outside of your budget. Think electronic money or "credits" like in the old Star Trek series. The idea here is to know how much you can spend in your monthly budget via cash only. Then instead of using cash, pull out your card and use it wherever you can, never going over your monthly budget.

Use #4: Extended Warranty Features

Many credit card companies will extend the warranty on many types of purchases (i.e. electronics, furniture, etc) for up to a year. You will have to register the item with your credit card company for the extended warranty to take effect.

Use #5: Concierge Service

Depending on your level of credit card, you may have this snazzy service. I personally do most everything myself and am not used to having this kind of service, but I do need to give this a try. The concierge will find you hotel reservations, flower and gift shops for upcoming birthdays or holidays, or book you a restaurant reservation. I've even heard from a Tim Ferris (of book "The Four-Hour Work Week”) blog post that concierge will find answers to some insane things – like finding distributors of wholesale liquid cheese. I would consider the fact that I get to speak right to a native English speaker (no automated system) with my Sapphire card a perk in itself, but actually it's not. Concierge is a nice perk all in all.

Use #6: Trip and Travel Coverage

These are actually several perks that I've put in one category. When purchasing travel & trips on your card, here are several perks you might not know about.

Trip Cancellation – covered up to a certain dollar amount for needing to cancel your trip – restrictions apply as to the reason for cancellation.

Lost or Delayed Luggage – coverage for lost luggage or delayed luggage with a minimum time frame (i.e. 18 hours) and reimbursement for essential items up to a dollar amount (i.e. $500 total).

Trip Delay – any costs incurred up to a certain amount because your trip was delayed to unforeseen circumstances.

Travel Accident Insurance – for death or dismemberment coverage up to the hundreds of thousands typically. Not that you'll be worried about this if it happens, but I guess it's nice to have?

Bonus Rewards to Look For: Watch for point promotions, where instead of single point promotions you can get 5x-10x times the points by using your card everywhere. I just signed up for it with my Sapphire card and they even back date it to the beginning of July! Pretty sweet. They do this to encourage everyday use of your credit card instead of cash, and hoping you'll slip up – but of course you won't, because you use your credit card the right way now, don't you?

Call your credit card company as ask them to send you the complete list of benefits, as it will vary for each company.

Stick with this new habit of using your card as "electronic cash", pay in full every month, and you'll be way ahead of the game over the average credit card user.

David Hamilton (aka FPT Guy) is owner and author of Financial Planning Tips – where you can find sensible information on personal finance for the Average Joe or Jane. Besides being passionate about his finance blog and helping others keep their finances in check, David also enjoys playing music, staying healthy, spending time with family and friends, and traveling the world.