In my financial independence checklist, I mentioned as the first point:
I should not have any credit card debt.
While this is true today, such was not always the case. A long time ago, I had an outstanding debt in six-figures on an American Express credit card and no bank balance to pay it off. The youthful exuberance of having a well paying job straight out of college was the root cause. I bought stuff that I really did not need and worse, on credit.
To further worsen the situation, I took a supposedly “interest free” six-figure loan from my employer to pay the credit card debt. No one told me that the “free interest” component of the loan would appear as perquisite while computing my income tax. It was a BIG mess and one that took a lot of time to get out of. That was when I put in place my credit card usage policy.
My Credit Card Usage Policy
- Have one credit card with no joining and annual fees and a low credit limit. I call this my Main Card.
- Have one credit card with no joining and annual fees and a sufficient credit limit. I call this my Backup Card. Sufficient is a value that you will need to decide looking at your personal situation. In my case, it’s in the five-figures.
- Do not carry either of the credit cards during your daily routine (includes to work, while shopping, going out with friends, and such). It’s true, I don’t carry a credit card in my wallet! I therefore “don’t have to worry” about future bills.
- Look at every other option before opting to purchase with a credit card. I faced this situation recently when I had to purchase a Dell monitor and finally used my Main Card for the purchase.
- If you really need to use a credit card to make a purchase, ensure that you already have adequate balance in your savings account and immediately pay off the card. When I bought the Dell, I paid the balance on the Main Card the very next day although the due date was a full billing cycle away. I don’t care for any “opportunity cost.”
That more or less has been my credit card policy since the meltdown. My first option is to pay with cash for any good or service. I’ve had a stress free experience on this front.
What’s your credit card usage policy? I’d love to know.