Using Credit Cards Responsibly Pays Off

Credit Cards: Good or Evil?

The debate is ongoing and the answer isn't as simple as black and white. I personally dislike the credit card companies -- all of them that I have dealt with to date. However, when used responsibly credit cards can be financially rewarding. In fact, I'm almost inclined to say that if you aren't using a rewards card, you are being overcharged.

Carrying a balance on a credit card generally doesn't count as responsible use (unless, of course you are using it for arbitrage which is a subject for another time). But even if you are in debt, there are ways to cash in on rewards and use that money to your advantage.

Before considering cash back rewards card you must:

• Have a zero balance on a rewards card
  This one might seem obvious, but I've seen people spending money to get rewards on cards with carried balances. Its not worth it! Pay off the card first. Wait a month and then reconsider your strategy.
  
  
• Track your spending
  You need a budget or at least an idea of how much you can spend each month. Stick to it to the best of your ability. If you can do this without a credit card, you can do it with a credit card.
  
  
• Be ready to pay your balance in full each month
  For me this took several months of cash only transactions to get me into spending within my budget. You have to be able to control your spending and have the cash to pay the bill in full each month.
  
  
• STOP charging to cards that carry balances
  This is the ONLY way you can be sure that your debt is going down. You can use rewards to accelerate debt reduction ONLY if you're rewards card has been (and continues to be) paid in full every month.
  
  
• DO NOT ADD TO YOUR DEBT
  Make sure that you have cash on hand (or in an interest yielding checking or savings account) before making any new purchases.
  

I average about 2.5% cash back rewards by using my Chase Freedom and Discover Open Road card. In addition to that, I keep enough money in an online savings account to pay for these expenses and I take advantage of the Grace Period.

What is a grace period? If you pay your balance in full each month you are given a period of time to pay your bill without being charged any interest at all. For example: I pay my phone bill on the January 7th, my statement date is January 21st, then my due date is February 16th. I get about up to a 40 day no-interest period to pay off new purchases as long as my last bill was paid in full. This no interest period consists of the statement period (typically one month) and the Grace Period (typically 20-25 days). How can I take advantage of this no interest period? I could take the cash for the phone bill. Deposit into an interest bearing account for 40 days, then take it out in time to pay the credit card bill. This alone can add up quickly.

There are a lot of reward card options. Assuming that you can get at least 1% back on your normal spending, you can expect at least 15% annual return of your monthly spending budget (1% per month plus 3% from a savings account). If you can find the right card or combination of cards you can expect over 30% of your monthly budget returned annually. (That is 30% of one month.) (I estimated this based on my own return: Using Chase Freedom and Discover Card I get about 2.5%*12 months+3% per year=33% of my monthly budget, annually.)

Today I'm going to go through an example to show my boyfriend how much he could expect to make if he fully utilized his rewards card. He recently got a National City Everyday Rewards Card.

The reward structure:

• 4% on Gasoline (up to $250 per month)
• 3% on Cinema and Video Rentals (up to $150 per month)
  
• 2% on Groceries, Restaurants, and Fast Food (up to $750 per month)
  
• Up to 1% on everything else (which is really only 0.25% on the first $10,000)

It says that you get $100 check when you reach $100 rewards. That part kind of sucks. Chase gives checks every $50 or you can get a $250 check once you've saved $200. Discover allows you to redeem at $20.

An example budget:

• $150 Gas
• $200 Groceries and Restaurants
• $500 Other including Cable and Phone Bills

Paying for all of these purchases using the rewards structure above would generate about $11.25 in rewards per month, or an average of 1.3%. If you were to keep the purchase money in a savings account with at least 4% interest rate (email me if you want an ING referral plus a $25 sign up bonus), you'd be making an additional $2.83 per month in interest. Without considering compound interest, thats about a $169 annual return (almost 20% of your monthly budget). The downside here is that you'd have to wait about 9 months to get your $100 check. Just to note: if you only used the card for gas, you'd have to wait about 17 months for the check, so it could be worse.

I never thought I'd be trying to convince someone to use a credit card when they could use cash. Is the couple hundred dollar return really worth it? The credit card companies make about 3% on every purchase that you make, so they are making money too. There's the rub, I don't want them making the extra money off of me, but hey, I need the cash. I don't really care whether you use your credit card for rewards, but you should at least know you're options. Every penny helps when you're trying to get out of debt!

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More about rewards:

• November Cashback Rewards: 2.8% @ Me vs Debt
• How You Can Earn Over 2.6% Cash Back by Using a Combination of the American Express Blue Cash and Chase Freedom Cash Visa Credit Cards@ Free Money Finance
• Cashing in American Express Membership Rewards Points @ Five Cent Nickel
• Pet Credit Cards @ Credit Card Watcher

Love Credit Cards:

• 25 Reasons to Love Credit Cards @ My Dollar Plan
  

Hate Credit Cards:

• Ways Credit Cards Separate You from YOUR Money@ Debt-Free Revolution

Hate Debit Cards:

• Your Take: Why Use Debit Cards? @ Blueprint for Financial Prosperity