There's no better time than the beginning of the year to make important changes to your finances. You can find plenty of ambitious ways to make your money life a little more comfortable. Yet when it comes right down to it, there's one single resolution that you can make to avoid falling into a downward spiral and start working toward your long-term financial goals.
It's not building an emergency fund, as valuable as that can be. Nor is it cutting back on unnecessary spending, although that can play a major part in it. No, the one thing you can do that will make a bigger difference than just about anything else out there is to use your credit cards in a way that they're working for you rather than against you -- and then starting to invest in the companies that have command of the lucrative credit card industry.
Digging yourself into debt
There's nothing about credit cards that automatically makes them bad. Used correctly, credit cards can allow you to aggregate your purchases conveniently and pay them off with a single monthly payment. The right cards even pay lucrative rewards for using them, offering you money and other valuable benefits that let you share in the money that the credit card issuers make from their business. Many of these cards don't even charge an annual fee, making them essentially free for you to use for your benefit.
But the big problem that many people fall into with credit cards is forgetting that there's no difference between buying things with cash and using a card to purchase them. At the end of the day, you still have to pay the bill. It's the illusion of choice that credit cards give you that gets people into trouble. In reality, with interest rates that are often almost usuriously high, cardholders really don't have a viable choice other than paying off their balances in full every month to avoid exorbitant finance charges. What happens all too often is that people not only can't pay their balances off in full but also choose to make minimum payments, and that's when a vicious circle begins that eventually makes them unable to repay their debt at all.
How to make money on credit cards
Credit card rewards are great, but the best benefits come from looking at who's on the other side of the credit card transaction. Just as you can always win at gambling by betting on the house, major players in the credit card industry have produced amazing returns over time.
Start with the card networks that are behind the majority of transaction in the U.S. market. Visa (V -0.65%) and Mastercard (MA -0.28%) both gained almost 50% in 2017, and over the past decade, their prices have gone up more than 700% and 600%, respectively. Add to that some modest dividend income, and total returns have been well above the average stock even in the nearly decade-long bull market.
Banks that issue credit cards have also done extremely well lately. Bank of America (BAC -1.46%), Citigroup (C -1.89%), and JPMorgan Chase (JPM -0.96%) all gained between 20% and 35% in 2017, rising on the back of more favorable conditions that included rising interest rate spreads for key banking business lines. B of A and JPMorgan have seen gains in the 150% to 160% over the past five years, while even lagging Citigroup has managed to pick up 90% since the beginning of 2013 -- again, not including dividends.
What to do in 2018
With those ideas in mind, here's what to consider as 2018 begins:
- If you're carrying a balance on your credit cards, your first resolution should be to pay them down as soon as possible. You won't find a better return on investment than avoiding the interest rates on most credit cards, many of which can exceed 20%.
- If you're fortunate enough never to have gotten into credit card debt, then make sure that credit cards are doing the most they can for you. That includes finding the reward cards that can pay you the most for the spending you'll need to do anyway.
- Finally, look at ways to invest some of your money in the businesses that profit from credit cards. By doing so, you'll be on the moneymaking side of the credit card business rather than the financially dangerous side.
Getting on the path toward financial security by using credit cards correctly should be your top priority for 2018. Doing so will not only help you avoid making big mistakes but will get you closer to your long-term goals -- and do so more quickly.