It seems counterintuitive that a personal finance writer would advocate the use of credit cards, but that's what I do -- provided that you can use your credit card responsibly and pay it off every month. Just like so much else in this life, credit cards themselves aren't evil. But using them in a way that is detrimental can result in a great deal of trouble. But if you use them the right way, your credit cards can actually save you money.
Choosing the right rewards
First of all, don't just choose any card with any old rewards program. You need to find a rewards program that works well for you -- offering you the rewards that you will actually use. Compare offers and decide what will benefit you the most. Whether you want travel points, cash or consumer goods, you need to pick a rewards program that will provide you with what you need.
Be warned: Too many different cards, with too many different rewards, can dilute the effectiveness of your rewards program. Instead, choose no more than three that you want to work on.
Create a plan for building credit card rewards that can save you money
Any financial planning tool -- including credit cards -- requires, well, a plan. You need to decide how you are going to amass rewards. However, the key here is to only spend money on things you would buy anyway. Here is an example of how I spend my money, and which credit cards I use to pay for them:
- Capital One No Hassle card: All grocery store purchases, gas and recurring bills. Receive miles that I can redeem for airfare or other travel. Last year: Free round trip ticket to New York to visit my husband's family. This year: Free round-trip ticket to Phoenix, AZ to see my grandfather. Planning to use the rest of the points for car rental and for hotel while taking a mini-vacation within the trip to New York.
- Upromise card: All online purchases. Percentage of purchases goes into an account that is in turn invested into a tax-preferred 529 college savings plan for our son.
- Cash back card: Large consumer purchases. Once the reward is $10, a check is sent. Almost every time we make a large purchase (computer, TV, sofa, etc.) we get a check in the mail. That check immediately goes into our emergency fund -- which is a high yield savings account. It's not the only money we put in there, but it gives the fund a periodic boost.
Retirement is our most important goal, but we find that we can work toward our next most important goals (defraying travel costs to see family and helping our son pay for college) without having to spend extra money.
Warnings when using credit cards in this manner
It is important to take heed. Without a plan, you can quickly fall into the trap of not paying off your credit cards each month, and entering the cycle of debt (and the attendant interest). Here are some things to remember when using credit cards to save you money:
- Once you start paying interest, the value of your rewards is eroded and can even be destroyed. So pay off your credit cards each month.
- Make sure that you have the money before you buy something. That way you will be able to pay off the credit card at the end of the month.
- Be aware that going over you limit or paying late can mean being locked out of your rewards. You won't be able to access them until you are back under your limit, or you've made your payment (and paid your late fees).
- Late fees and over the limit fees can erode the value of your rewards.
If you plan carefully and use your credit cards in a constructive manner, you will find that your credit card companies are paying you -- instead of you paying them.
Miranda Marquit edits information on debt consolidation for DestroyDebt.com.