One of the seven deadly sins of personal finance, at least according to many finance pundits.
And while credit cards do present a huge problem for many Americans, they can also be an incredibly useful part of your personal finance strategy.
The trick is to understand yourself and your tendencies, as well as your level of discipline and current financial state, and to determine whether you are someone who can use credit cards responsibly.
If you can use your credit cards like you would a debit card (only purchasing things you would normally be buying), have a designated budget (not spending more than you’re earning), and pay them off in full every month, then this article is for you.
If not, we highly recommend not using credit cards as part of your financial strategy. It’s critical that you’re able to remain disciplined and pay your credit cards off as needed to avoid paying interest. If you’re paying interest every month, any benefit we’re about to mention will be wiped out.
So, without further ado, let’s take a look at 5 ways to make credit cards work for you.
5 Ways To Make Credit Cards Work for You
1. Cash Back
One of the most common ways your credit cards can work for you is by earning cash back. There are tons of cash back credit cards out there so everyone can find a product that works for them.
While the specifics of the perks will vary, the common thread is that the card holder will earn a percentage of each purchase back, which can be redeemed later for cash.
For instance, the Chase Freedom offers 5% cash back on rotating bonus categories and the Chase Freedom Unlimited offers 1.5% cash back on all purchases. You can also check out this list of the best cash back cards from NerdWallet for other options.
Obviously, the amount of cash back you earn will depend on how much you spend throughout the year, but even a little bit over a long period of time will add up.
For example, let’s say you spend an average of $1,000 a month with your Chase Freedom Unlimited, which offers 1.5% cash back on every purchase. Over a year, that $12,000 you put on your card will give you $180 back in cash.
Now let’s say you spend an average of $500 a month with your Chase Freedom at 5% cash back on rotating bonus categories. At the end of a year the $6,000 you spent on your card will put $300 back in your pocket.
Of course, you should never buy things you weren’t already planning to buy just to earn more cash back, but even $180 or $300 back a year is nothing to sniff at.
After all, that money is coming from spending you were already planning on. Cash back credit cards put money in your pocket simply by choosing to do your spending with a credit card.
Rewards credit cards are very similar to cash back credit cards (and even include cash back cards), but in this case your spending is earning points or miles that can be redeemed for travel and other things.
Rewards credit cards offer a wide range of possibilities. The most common, as previously mentioned, are travel rewards credit cards. These cards allow you to earn 1 or more points/miles for each dollar spent. Depending on the card, you could earn points/miles for airlines, hotel chains, and car rentals.
There are also rewards cards that are not connected with any specific travel brand, but rather can be redeemed for a variety of things or transferred to partner brands. Chase Ultimate Rewards is a good example of a flexible rewards program.
Although travel is the most common option for redeeming points earned from rewards cards, there are other options as well. Some rewards programs allow you to redeem for experiences like concert tickets. Other might offer movies, technology devices, or other various products that can be redeemed with the points earned.
Whatever you are most interested in, spending with a rewards credit card allows you to redeem your rewards for free activities/products, all earned by spending money you were planning on spending anyway.
One major benefit to using credit cards over debit cards for your purchases comes from the increased protection that most cards offer.
The main protective benefits offered by many credit cards comes in the form of insurance and fraudulent purchase protections.
For instance, the Chase Sapphire Preferred comes with complimentary car rental coverage for rentals purchased with the card. This particular card also offers trip cancellation/interruption insurance and travel accident insurance.
Most credit cards also offer protection for fraudulent purchases, often with $0 liability to the card holder. Other potential perks include extended warranties, price protection, lost luggage coverage, and roadside assistance.
With so many protective benefits out there, it’s worth it to put major purchases (especially travel) on a credit card offering these benefits.
If you pay your card off every month, you’ll receive all these benefits for free!
4. No Interest Financing
Yet another powerful way to make credit cards work for you is to take advantage of no interest financing.
You’ll most often see no interest financing options with store brand credit cards. Typically, these offers advertise 0% interest for a promotional period upon approval of the store credit card. You’ll also typically need to spend a minimum amount to be eligible for the promotion.
Note: Sometimes the promotional offer is a certain percentage off your purchase. We don’t recommend signing up for store brand cards for these kinds of promotions because the percentage off will only be beneficial with a large purchase, and then you’ll need to pay the balance off right away to avoid high interest.
No interest financing is a great way to soften the blow of a large purchase.
For instance, I recently took advantage of 18 months no interest financing on a new stereo and back-up camera system on my truck. Sebastian also recently took advantage of no interest financing to replace the flooring in his house.
The catch, and danger, comes when you don’t pay off your balance by the end of the promotional period. If that happens, you’ll be charged all the interest from the beginning of the promotional period, meaning you won’t have saved anything in interest.
To ensure you pay your balance off before the end of the promotional period, make sure you determine how much you’ll need to pay every month and stick to that budget. To be extra safe, we recommend budgeting yourself so that you’ll pay the balance off a month or two in advance. You don’t want to be hit with months’ worth of interest because you were off by a few days.
DO NOT sign up for the card and then fail to make monthly payments on it. If you do, you’ll likely fail to make significant payments and be stuck with a large balance and tons of interest when the promotional period ends. In fact, that’s how these card companies make money. They catch more people than you’d think.
It’s likely you’ll be asked about promotions at any large brand store you visit, but make sure you limit the number of store brand credit cards you sign up for, and only take advantage of those that offer no interest financing. You don’t want to get stuck with multiple large balances at high interest!
However, for one or two large purchases you’ve budgeted for and are planning to make, taking advantage of no interest financing allows you to spread the payment out over a period of time, all without paying extra in interest.
When used correctly, no interest financing allows you to essentially get a loan for free.
5. Grace Period
The last major way you can make credit cards work for you is through taking advantage of your credit cards grace period.
The grace period is the time between the end of the billing cycle when you receive your statement and when the payment is due.
The grace period is typically 21 days, and the benefit is that if you pay off your balance during that time, you won’t pay any interest.
In essence, the grace period allows you 21 days to pay off your balance interest free. Another way to think about it is that the credit card company is giving you a free loan for three weeks every month as long as you pay that loan off.
While 21 days may not seem like a lot, those three weeks will typically mean you’ll have earned another paycheck or at least had time to find a way to make the money needed to pay your balance.
As with any of the items on this list, make sure you don’t spend beyond your means and what you can comfortably pay off within the grace period every month. If for some reason you’re not able to pay the balance in full, make sure you don’t continue to run up charges unless you’re confident you’ll be able to pay your balances off moving forward.
Moral of the Story
Credit cards can be an incredibly useful part of your overall financial plan if used correctly and responsibly.
In fact, there are many ways to take advantage of the system by making your credit cards work for you.
You can make credit cards work for you by earning cash back or other rewards, utilizing various protections offered by credit cards, and taking advantage of no interest financing opportunities and grace periods.
Remember, you MUST pay your credit card balances in full every month (or before the end of the promotional period) and avoid paying interest for any of the above benefits to matter. If you regularly pay interest, all these benefits will be neutralized.
But, for those who can responsibly use credit cards, the benefits you can earn for purchases you would already be making offer one small way to take advantage of the system.