Ask around the personal finance community and you may hear strong opinions about using credit cards. Some argue that they should never be used because they trick you into overspending, which is not totally wrong. And others insist that credit card churning using several cards for all your purchases is the way to beat the system and rack up cash and points– again not totally wrong either. But both of these are extremes that I would not recommend. Instead, let’s take a look at a moderate approach to using credit cards to your advantage.
Public Service Announcement: If you do not trust yourself to use credit responsibly and especially if you have a spending addiction, this post is NOT for you. Credit cards make credit so readily available to you it is very easy to overspend and if you are an impulse buyer or do not carefully track your spending and ensure you have enough funds to cover your purchases, you should not use credit cards at all. In those cases, credit cards are far more trouble than they are worth and you can end up thousands of dollars in debt in no time without even realizing it.
For folks considering the other extreme, I do not recommend credit card churning. Churning is when you use credit cards, often several at once, and churn purchases through them to take advantage of account opening bonuses and specials, resulting in earning high point or cash back values. Opening several credit cards at once can be a major blow to your credit score, it can cost several hundred dollars each year in credit card annual fees, and it takes a lot of careful tracking and self-control to monitor all your purchases through each card, and is essentially spending a lot of mental energy to build a house of cards to get $3000 back in points to use in free airfare. Also considering the amount of money you need to be able to spend on each credit card each year to hit the bonus point thresholds, this is not usually an option for lower income households.
Now, where is that middle ground for responsibly using a credit card to your advantage? Ah, here it is. Credit cards can give you several advantages that using a debit card may not. Let’s take a look at some of their benefits and how you can maximize them.
Float A Purchase and Earn Interest
We all try to be responsible with our money and save up before a big purchase rather than putting it on a credit card, but sometimes you need to make a purchase today that cannot wait. Maybe your refrigerator died or your dog needs to go to the emergency vet and you don’t yet have enough money to pay for those expenses without whipping out the credit card. No problem, that is precisely what the credit card was invented for, so you can make the payment today and then pay the credit card company within 30 days. That can allow you to wait until your next paycheck or two to get the money together to cover the payment. Not only does the card give you a little float time, but it can earn you interest as well. Okay, a credit card company is not going to pay you interest for making a purchase, but if you have the money in savings or in an investment that you would otherwise use for that purchase, you don’t have to take it out of savings or sell the investment if you can otherwise make the payment in the next 30 days, say from your regular paychecks. That way you can continue earning interest on your invested money and can still make the purchase that you need right now.
Earn Miles and Cash Back to Fund Future Purchases
If you aren’t earning airline miles, points, or cash back on your credit card, you need another card. These reward programs can be an amazing perk when used responsibly and you can use these points or miles to fund future travel or purchases. Now, don’t fall into the trap of thinking you should spend money just to get the miles, that defeats the purpose. But running your everyday purchases through the card can net you a very nice stack of cash back or airline miles over the course of a year. When choosing a card, carefully consider the annual fee of the card (usually around $100, but can be several hundred for some high-mile-earning cards), how much money you are likely to run through the card (based on your regular monthly spending habits for gas, groceries, clothing, travel, restaurants, subscriptions, utilities, and anything else you can use the card to pay for), and the value of the points or miles you could reasonably earn in a year. If you are not a huge spender, then don’t go for the high-mile-earning card with the $500 annual fee if you would only reasonably spend enough to get $300 back in cash back or airline mile equivalents. You can also take advantage of high point earning promotions when you first sign up to help you make large point gains, especially in the first year of using the card. And make sure that you will use what you earn, there is no sense in earning airline miles if you never travel that airline or that can only be redeemed through the card’s overpriced travel planning services.
Use Cards To Track and Categorize Spending
Many card companies can now easily track your spending for you, categorize it into restaurants, groceries, gas, clothing, and other purchases, and can show you right on your bill or their website just what percentage of your spending went to Amazon purchases (hint: it is probably more than you thought). This is so helpful when tracking your spending and can help you rein in your excess purchases in any category. Just as with your bank statements, be sure you review your credit card statements frequently and thoroughly. Using a credit card can give you an additional layer of fraud protection so you don’t have your bank account cleaned out if your card number gets stolen and you don’t end up in a bind while you wait for the bank to credit you back for fraudulent purchases. But you still need to be able to detect those fraudulent purchases quickly, so log into your credit card’s app or website at least once a week to review your purchases to make sure they are legitimate and see how your spending is shaping up in each category.
Build Credit For Larger Purchases
Three of the largest contributors to your credit score are your payment history, available credit, and whether you pay on time. These are all tracked and reported to the three credit bureaus by credit cards and allow you to build credit and improve your score so you can get a favorable rate on a home mortgage or auto loan. You don’t have to spend a lot on your credit card every month to improve all three of these metrics. In fact, the less you spend the more available credit you have and the more likely you will be able to pay it off in full every month, on time. Flexing your credit muscle allows you to practice restraint and responsible use of credit, while building your good credit history to help you get a favorable rate for a larger future purchase.
In terms of tracking your credit, many credit cards will give you free access to track your credit score. Some even have an easy to see widget when you sign into your account on their app and website so you can see your score right away, and services that will email you when your score goes up or down. You can also track your score by opening a free account at Credit Karma. While it won’t give you your score, you can pull your entire credit report for free once each year from each of the three credit bureaus by going to www.annualcreditreport.com.
You can absolutely use credit cards to your advantage to earn airline miles and cash back, build credit, float purchases, track and categorize spending. Since you have access to easily borrow money on your credit line just by swiping a card, tere can be some dangerous pitfalls with using credit cards. But a responsible person can overcome this temptation and can reap the reward of using credit cards, pun intended. Good credit is important not just for a favorable rate for a loan, but also for an employment background check, getting approved for a house or apartment lease, even determining whether you pay a deposit when connecting utilities like water and electricity. You can check your credit score easily using any number of online tools through your bank or credit card company, or even free reputable websites. It is recommended that you review a copy of your credit report annually to check for fraud and make sure all accounts are reporting properly. Using your credit card to your advantage can truly pay you back, not only in airline miles but in a better credit score as well.
