AJ: I begged Kirby to write a series on how to use credit cards to your absolute benefit, and I’m so excited about this post. Kirby is an absolute machine at navigating the positive side of credit card and bank account benefits. Heed his advice, the points and cash back benefits are well worth it!
KJ: Beware: the information contained in this post may make you suddenly generate extra cash. This sudden windfall might leave you with a strange feeling of ‘why haven’t I always done this?’
I got my first credit card in my first year of college. There were offers around every corner (something quite disgusting for college students who typically have little wherewithal or knowledge on how to properly manage a credit card), so it was (and is) important to pick a credit card that is right for your lifestyle whether that be mileage benefits, cash rewards, or other rewards programs. At the time, I didn’t even have to provide any documentation showing what my income was in order to determine how much credit I could qualify for. Why is that okay? From the get-go, many companies are setting you up for failure. Why wouldn’t a college student with little income per month not say ‘sure, I’ll take $2,000 of credit!’? ‘It’s okay, I’ll just pay it back when I get that great job’…
My view for the only way to optimally use a credit card is to use it for your regular monthly expenses, earn rewards, and pay it in full at the end of the month. If you instead add expenses and simply make the minimum monthly payment, it would take you YEARS (or even DECADES if you are adding anything to the card each month) to pay it off, and that $1,500 tv that was such a ‘steal’ could end up costing you over $2,800! Since the interest rates that most companies charge are exorbitant (the best rates can be around 9% per year while good rates can still be in the mid-teens), it’s easy to fall victim to credit card companies. Few are designed to actually help the consumer from a long-term perspective, and in fact many keep the consumer indebted for years. When used properly though, you can enhance your savings by gaining some attractive rewards.
Here are the rules and guidelines I live by:
1) Do not get a credit card you cannot pay off regularly.
- The expenses and interest you will pay will FAR outpace the benefits you would have otherwise received no matter how enticing the card’s initial terms or rewards. Some of the best cards available for rewards I’ve found are Chase’s Freedom card for cash rewards as well as some of the Citi American Airlines cards for airline rewards. As unique as a budget, not all credit cards are for everyone, and one size does not fit all.
2) Get the card that fits your lifestyle to maximize the benefits.
- Shop ’til you drop. Not for purchases though! Do your research upfront Bankrate.com is a great resource to evaluate different credit card offers). For us, our preference is for cash rewards.
3) Save most (or all) of your rewards.
- If cash rewards are your elixir, when you come across ‘sudden’ money in the form of rewards redeemed, try saving it all (or at least save an equal amount to what you plan to spend). You didn’t have the money yesterday, and you don’t have much control of when it will hit next, so why tack it on as an increase in your lifestyle and living expenses? Once you get accustomed to a certain lifestyle, it is tremendously difficult to take a step back.
4) Stick to your guns.
- If you open a credit card for the rewards, and you plan to close it after the initial teaser reward, then stick to your guns. Pay attention to minimum holding periods (six months for some cards) where the rewards are eliminated if closed within that period of time. This is particularly important for some of the glamorous first time card offers. Especially with some of the bonus airline mileage cards, they have a fee after the first year of the card, which may make the card become unattractive after the grace period.
5) Credit is better than debit.(1)
- Compared to the debit card counterparts, you often have more protection against wrongful purchases and product returns in the event that something doesn’t work as the merchant promised.
6) Find ‘foreign travel’ friendly cards for out of country visits.
- Certain credit cards are ‘foreign travel’ friendly with minimum transaction costs and exchange rate fees. In my experience, Schwab and Capital One have been good companies for travel protection, access, low fees, etc. especially since they both typically reimburse all ATM fees. If you’re traveling out of the country, be mindful of charges for foreign transaction fees and conversion charges. Foreigners are particularly susceptible to identity theft/fraud, and watching your accounts regularly to see if something crops up is important.
7) Cash advances can be dangerous.
- They start charging you interest from the day you take the cash out. As such, use only as a last resort!
8) Try something new: LOWER your credit limit.
- Contact the credit card companies to reduce your available credit amount. Hear a pause at the end of the phone followed by a ‘what is that you say?’ and you will know it’s not a common question they receive. It’s so easy to fall into a trap of having several credit cards: the access to a higher credit limit and other rewards can be intriguing, but it can get you into trouble. If you reduce your credit available, you will have to rely more and more on your personal savings and cash before making a large purchase, but you will find yourself in a much stronger financial position long-term. Our grandparents used to pay for everything with cash (cars, larger down payments on a home, appliances, furniture, etc.), so why not bring cash back into style?
9) Do the math.
- If you are applying for a card with an annual fee, calculate if the rewards for what you regularly purchase more than offset the annual fee compared to other rewards cards. In order for the math to work, sometimes it entails increasing your expenses to make the rewards worthwhile, and that’s precisely the last thing you should do!
10) Easy isn’t always better.
- Credit cards make access to money easy, but when was the last time the easy route was the best route?
The methods outlined above are really only feasible if you have a good handle on what your income AND expenses are each month (see also our relevant posts: How to build a budget and Budgeting: a very good place to start). Then, you really KNOW what you can and cannot afford. Follow the steps of:
- (1) establish an emergency fund,
- (2) eliminate credit card debt, and
- (3) begin saving for your future goals (vacation or retirement).
You will find you are in a much better position to handle the unexpected that invariably comes up.
For some additional references with comparisons of credit cards versus debit cards:
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