There are personal finance bloggers and writers who believe that credit cards are evil, and that you should never, ever use them. If you can get by without debt, and if that’s your choice, I’m all for it. Everyone should do what works for them. However, I firmly believe that credit cards can be used to your advantage. However, like all things personal finance, to use credit cards successfully you need a plan.
Know Your Rewards Programs
One of the best things you can do is understand your rewards programs, knowing which work best for you. There are some credit cards with flexible rewards, allowing you to choose different options when you decide to redeem. I have two main rewards programs that I focus on. One is a college savings program (every little bit to help my son pay for college), and the other is a flexible program that lets me choose between miles, hotel stays, cash and statement credit. I have other credit cards, but they are mostly open because they’re old accounts. To keep them open, I buy something on occasion — and pay it off.
To be honest, most of what we buy goes on the more flexible card. Putting groceries, gas and other regular purchases on one card helps you earn rewards faster. We do this so that we can build up points to save us money when we travel to see family. The college savings card is basically the “online purchases” card. We have a little toolbar that helps us see where we can get additionally funds, in addition to the rewards that come with using the card. We still comparison shop to save money, but the extra tools allow us to see where we could be maximizing the rewards for college savings. Figure out which rewards are most important to you, and look for a card that offers rewards you will actually use.
Avoid Fees — Especially Interest Fees
The idea of using credit cards to get rewards points for free travel and cash is not new. However, if you are going to use your credit card to best advantage, you have to stick with your plan. You have to track your spending to make sure you don’t incur over the limit charges. You also have to make sure you don’t spend more than you have in your budget. Just because you’re using a credit card doesn’t mean that you shouldn’t stick to some sort of spending plan.
In order to get the best advantage with your credit card, you have to pay off the balance each month. Avoid interest charges. When you have a plan for your credit cards, it is easier to keep from overspending to the point where you carry a balance and pay interest charges that erase your rewards benefits. Also, try to avoid cards with high fees and that charge annual fees.
Bonus Tip: Use credit cards to reduce your interest rate. If you currently carry a balance on any of your credit cards then consider opening 0% balance transfer credit card, which will allow you to move your balance to a 0% interest rate for a set period of time, reducing the amount of time it takes you to repay your balance.
Don’t Forget Your Credit Score
Another reason that credit cards can be helpful is that they are one of the easiest and fastest ways to improve your credit score and establish credit. When you use credit cards with a plan, making the payments and keeping your debt to credit available ratio low, you improve your credit score. This can help you save money on mortgage and car loans, since a good credit score can result in a lower interest rate. Additionally, your good credit can help you get a discount on your auto insurance premiums.
You need to be careful with credit cards, but if you use a little planning, you can use credit cards to your advantage.