No one would say no to free money,
right?
Well,
many of us miss out on free money that is already sitting in our wallet or is
readily available with just a few clicks. I am talking of course about the
world of credit cards. Though often rightly regarded as money traps for the
profligate or undisciplined, credit cards can be a valuable source of cash-back
or travel perks.
*
* *
Reward credit cards can be roughly
divided into two broad categories: cash-back and travel. Cash-back cards are
the most versatile, allowing a family to earn 1% to 3% or more cash-back on
frequent purchase categories, such as groceries, gas, or restaurants.
Travel-oriented credit cards allow consumers to earn points or “miles” redeemable
toward hotel stays or airline tickets. These cards often come with additional
valuable perks, such as priority boarding, free checked bags, or free hotel
nights. At the same time, they offer the potential for redemptions worth 10% or
more of your original purchases when used for luxurious hotels or international
business-class airline seats – though that value is subjective, based on how much one values a
luxury experience over a regular seat.
A word of
caution: Consumers who do not intend to travel in such luxury or pay
resort-level prices will struggle to maximize the marginal value of travel
cards over cash-back cards. The good thing is that you can obtain different
cards for different purposes.
When
combined with other tools, such as Honey, Ebates or ibotta, families can earn
2% to 3% or more back on all their
spending. But let’s not get ahead of ourselves. Before you start assembling
your travel itinerary or imagining what you can buy with all that extra cash-back,
here are important tips to keep in mind.
Rule
#1: Don’t fall into the interest trap.
This is
the holy grail of tips. The most important. The ultimate rule. Do not use credit cards to buy things
with money you don’t have – even if you think
you will make the money later. What happens if you don’t get paid on time? You
don’t want to play hot potato with the credit card companies and be stuck
holding the bill. Reward cards are only worthwhile for those who pay their card
in each month. If you are carrying a balance, the massive interest rates negate
the value of the rewards.
Rule
#2: Treat your credit card like a debit card...
This is
exactly what it sounds like. Just as you would not buy something if you don’t
have enough money in your account, because the debit card purchase won’t go through,
so too, you should only use your credit card if you have enough money in your
account to cover the purchase. By the same token, you should go online and pay
your credit card bills as often as possible, just as if the money were coming
right out of your account, as it does when purchasing something with a debit
card. This will help you from failing at Rule #1 as well as help keep your
credit limit utilization down, which is an integral part of your credit score
calculation.
Rule
#3: …and
your debit card like an ATM card.
It’s very
important to treat your debit card like an ATM card. This means to only use
your debit card to withdraw and deposit your cash/checks. Because you likely
don’t receive any points, miles, cash-back, or other awards from using your
debit card, you should use a credit card at almost any place that accepts
payments, rather than using a debit card or cash. The money is being spent
anyway (the groceries aren’t paying for themselves!) so you might as well get
something out of it, even if it’s “only” 1% back.
Rule
#4: Use
cash only in a last-case scenario.
This is
similar to the debit card rule. Since as you don’t receive points for the cash
you spend, and the money is being spent anyway, you should always attempt to
get points or cash-back for your purchases. In addition, with many credit
cards, you have purchase protections or lost item protections, which you would
not have if you are spending cash. Also you have the added benefit of not
carrying cash around, which, if stolen or lost, you cannot get back. If your
credit card is lost or stolen it can be replaced, and you will almost never be
responsible for fraudulent charges.
Rule
#5: Maximize
your rewards.
If you
have more than one credit card, knowing where to use each one is very important.
Suppose you have one card that gets you 4% cash-back for spending on Uber and
at grocery stores and 1% everywhere else. You have another card that gives you
a flat 2% cash-back everywhere. You should use the first card at grocery stores
and on Uber only, and use the second
card everywhere else. It gets more complicated the more cards you have, but it
is important to keep track of the rewards you get on each card, so you don’t
lose out on potential rewards.
Rule
#6: Understand
the importance of sign-up bonuses.
Sign-up
bonuses are the single greatest perk of getting a credit card. They are usually
accompanied with a minimum spend threshold to receive it: for example, $500 for
spending a minimum of $3,000 within three months of the account’s opening.
*
* *
It is worth repeating: Rewards
credit cards are not for those who carry balances, as reward cards charge the
highest interest rates, far outweighing the benefit of cash-back, points, or
miles. Those families who need to keep a small revolving balance from month to
month (a valid strategy for some) are better off utilizing interest-free or
low-rate cards.
Remember
to check out DansDeals, The Points Guy, and other sites (using filtered
internet of course) for specific strategies, pointers, reviews of different
cards, and general advice on earning and redeeming points and miles. Also,
check out Credit Karma to see your credit score or get free help improving it.
Most importantly, remember the most valuable resource of all: time. Time spent
earning that extra 2% on even a $100 or $1,000 purchase is often better spent
elsewhere.
