After reading this thread on digg, I felt compelled to share some tips for managing your cash flow by using and abusing those nice credit card companies which send you junk mail every week.

Credit cards are a scam in many, many ways. First and foremost they’re a tax on people who pay cash at vendors who accept credit cards. If things were fair, people who paid cash would be given a 3-5% discount at the register.

Use Cash-Back Credit Cards

Since life isn’t fair, let’s first discuss cash-back credit cards:

Here are some examples. Basically these allow you to take advantage of the poor schlubs paying by cash by having them subsidize your merchant fees and giving you a cut back from the credit card company. Think of it as a minimum of 1% off of everything you buy.

Both the cards I linked above also have a 0% introductary APR for a year. Think of it as a 1-year 0% loan, a pretty unbeatable deal if you ask me, considering the 3.5% inflation we’ve been experiencing lately. What that means is that in real dollars, the loan is actually at a -3.5%, which means you should be carrying a balance and making the minimum payment instead of paying off your card in full every month. Instead, and this is the important part, you need to plan and save the money needed to pay off the card in that final month before your APR runs out. Otherwise you will become one of the suckers out there paying an interest rate on their credit cards, instead of one of the people taking advantage of said suckers.

Build A Credit History

You are building a credit history when you use credit cards. When I was 20 years old, I had a salary well into the 6-figures. However I still had issues with buying my first car. Why? No college and thus no credit history! I ended up having to get a short-term loan from my family (paid back in a month) so that I could pay 50% down on the car. Looking back, I feel foolish for even doing that instead of buying used with cash on hand. Now, 7 years later I have a credit score north of 700, own a house, and use credit cards as much as I possibly can and I wish I could use them for everything. I would love a 1-year loan with a 1% discount on all of my bills. On every bill that has the option available, I put it on a credit card which I will not be paying off until early next year.

Take Advantage of Grace Periods

Grace periods are a very nice thing. I use an ETRADE Savings Account with a 5.05% interest rate. Like all savings accounts, I can only withdraw money from it 6 times a month (FDIC Rules), so I do not want to be paying each of my bills seperately from it. Instead by using a credit card I am able to lump all of my monthly expenses into a single bill which I then receive an interest free loan (grace period) on for up to a month’s time. The amazing thing is, this is a free service!

Spend Someone Else’s Money

When you pay using a check or debit card or cash, you are spending your money. When you use a credit card, you are using the lender’s money. Because of this, you always have more power as a consumer when using a credit card. Credit Cards generally give you added benefits such as built-in warrenty protection and refund availability. Again, this is a free benefit you get by spending their freely loaned money.

Keep Track of Your Spending

Credit Cards are an absolutely terrible idea if you do not have the ability to control your spending (ie, I don’t make “more” purchases because I 40k in available credit card debt) and if you are not able to correctly manage the balances you accrue. You absolutely must either pay the minimum balance on a 0% APR card, or pay the balance in full when it comes due. If you do not do this, you may have your 0% APR immediately taken away on all of your cards and you could be liable for a tremendous chunk of change. With automatic bill pay and simple cash flow management features in Quicken, this should never be an issue. But procrastinators and people unable to spend 10 minutes a month managing their accounts should avoid credit cards like the plague.

Plan For the Future

Everything you do financially is based on a central theme: planning. If you don’t know where your money goes, how much you save, what your rate of return is, where your assets are allocated, what your cash flow is, and what your tax-consequences are…well then you really haven’t got a good grasp on your finances. If you don’t already, I would strongly recommend going out and purchasing a copy of Quicken to start getting a grip on your finances. I will post some details on how to get started on managing all of these interconnected things in a future post.