How to use credit cards to your advantage

KJ: Knowing how to use credit cards to your advantage is a powerful financial skill. With so many credit card rewards programs out there for cash back rewards benefits, airline mileage rewards and travel rewards, we’ll help walk you through how you know what’s right for you.

Six credit cards

Create a list of your goals
As with most other items we talk about, put pen to paper and discuss what the heart of the matter is with your goals. Some considerations are:

  • Are you looking to leverage your favorite airline miles credit card, so you can send your family on trips periodically,
  • Are you yearning for cash back credit card rewards to put some extra money in your pocket?
  • Do you have a go-to hotel chain that you want to earn some hotel credit card points with?
  • Are you paying down debt and need a 0% credit card balance transfer for a period of time to help with your interest payments?
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    The answer to each one will help direct you to what type of card may be right for you and your current needs.

    Evaluate your current credit cards periodically
    Our cards of choice have always been cash back credit cards, so I recently did a full analysis of our credit card rewards we earned last year based on what we spent and what cash rewards we actually earned. We use the Chase Freedom & Chase Sapphire cards for various expenses (with one card used exclusively for business expenses), but with rotating 5% categories, miscellaneous promotions, and changing terms, it’s a complicated mess to say the least on what you’re actually earning – thus my desire to calculate the cash back we earned on our credit cards for this last year! It’s been a long time since I actually calculated the figures, but when I calculated it all, I discovered we earned about 1.25% (without including a sign-up bonus of $400 we benefited from on a card we opened last year) when looking across ALL purchases…not too bad, but certainly room for some improvement.

    Consider changing credit cards if the results are disappointing or below your expectations
    There are definitely some better cards out there, so we’re currently looking to find what we can tweak to maximize these benefits even further for 2014 and beyond. One thing I’m considering is finding some of the specialty cards where you consistently earn 5% in a specific category (one for gas, one for groceries, etc.) to see if those might make sense for our spending. Plus, we have a couple cards now that served their purpose for a sign-up bonus and are now ready to be closed.

    Try to keep your oldest account active
    I have a tendency to get a little overzealous with new accounts sometimes, so it’s important to do a double take to ask yourself if the *potential* benefit is worth the extra time and energy spent in opening a new account, linking it to your Quicken or Mint.com logins, etc. It’s not great on your credit score overall to constantly open and close accounts, but there’s a certain amount that can make sense. Particularly once you attain a certain level of your credit score, these changes make little overall impact (in my opinion).

    One good rule of thumb to keep in mind is to always look to keep your longest held credit card(s) open despite all the changes you’re making. Since your average credit length is a component of your credit score, the older cards help benefit your scores. However, it’s important to weigh the benefit against any annual fees and in light of your overall goals. It’s probably not worth the annual fee just to keep it open, so try to find a card without an annual fee or minimum purchase throughout the year. But, if you do need to keep the card active, consider just charging something as simple as toothpaste or an essential grocery from time-to-time to keep the card active/open.

    Avoid carrying any balance
    Despite all of this analysis, it’s important to avoid carrying a credit card balance at all. Use a cash flow system to help you track your expenses, so you can be empowered to really control your expenses from month to month and can avoid having a balance on any cards that is carried over. If you do end up carrying a credit card balance, say “goodbye” to the enticing sign-up rewards and the ongoing mileage/cash back/travel rewards as the interest payments are sure to eat up all benefits and more!

      Have you ever analyzed your credit card rewards?
      Do you have a preference for a rewards credit card?
      Tell us what you have done that works for your spending style and goals!

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