The financial community is often opposed to using credit cards in any form, and for good reason, they are the second-worst form of debt next to payday loans if you carry a balance. However, I’m here to tell you that if used appropriately, they should be thought of as a free short-term loan with benefits. You can earn a return on your card with regular everyday spending which beats paying cash or debit and allows you to keep track of your spending more easily.
When Credit Cards Make Sense
- Credit cards can earn you rewards and save you fees. If you pay off your balance every month, credit cards allow you to earn rewards and save you from needing to either carry cash at all times or using your debit card, which offers no rewards and can include its own fees. With my everyday spending rate, I usually rack up enough points for at least one free flight a year somewhere and I am not doing anything extra except making my payments on time.
- Credit cards allow you to track your spending habits online more easily and offer other benefits such as extended warranties and travel insurance. Two or three credit cards, say a Visa and a MasterCard, with manageable credit limits are the most you should have. Make sure no more than one has an annual fee. I think even a small $500 limit can help you build your credit score, and allow you to take advantage of a lot of the benefits of owning a rewards credit card can give you. Why have two or three cards? If a store does not accept Visa or MasterCard, then you will have a backup. Also, if one is stolen or compromised, you still have access to a card. Avoid those credit card offers you receive in the mail. Only apply for a credit card if you need it, however.
Things to Watch Out For
- Stay within your credit limit. Banks often charge a hefty fee if you go over your limit, assuming your credit card transaction was not denied.
- Do not use your credit card for cash advances. Most credit cards can be used to take cash out of the ATM. But when you do this, the issuers charge even higher interest rates on this amount and/or fees. Moreover, most cash advances do not have a grace period, so interest starts accruing the second you take out the cash. The only thing worse than credit card interest rates is daily credit card interest rates.
- Store credit cards. They often have higher interest rates (on average 24.99%) than standard credit cards (average 16.15%) and they often have limited use (ie. can only use them at their store). Furthermore, they can come with limitations on the redemption of your points such as only being able to use it in-store. Moreover, a lot of store-branded cards advertise zero percent interest when in fact it is deferred interest, meaning if you don’t pay the purchase back in full by a certain date, you will get hit by the backdated interest for the entire promotional period. Ouch!
- Automatic credit card limit increases. Your credit card company will sometimes automatically increase your credit card limit. Gauge if you’re comfortable with that or not or if the temptation to splurge is too great. If you don’t want the increase, you can simply call them back and ask them to decrease it. The upside to having it increased is that your credit utilization will go down, assuming you keep the same balance or pay it down. This translates to a higher credit score.
- The fact that 60% of people do not pay off their credit cards every month. If you have a credit card, pay off the balance every Did you know that people typically spend 47% more when using credit instead of cash? This also includes debit cards. Why? Paper is real, and we feel a tangible sense of loss using it to pay. Psychologically, when you pay with cash, you tend to spend less. If you find you spend more because you use a card instead of cash, either lower your credit limit or cancel your cards and pay with cash.
Maximize Your Rewards
- Even a basic, cash-back or travel rewards card offers 1% to 2% back. Some cards offer higher rewards with an annual fee. Chances are you will only spend enough during the year earning rewards to make it worth having only one card. If the rewards are less than what you are paying in annual fees, switch all your cards to no annual fee cards.
Here’s an example of the rewards I get from my American Express Cobalt:
- Monthly spending on food and groceries: $500
- 5x points multiplier for groceries = 2,500 points a month X 12 months = 30,000 points a year
Just spending money on food and groceries and I already have enough points to fly to another province! Add in the extra 2,500 points a month they give for the first year, and I will have enough to fly to Europe and back. And that’s just spending $500 a month, nothing out of the ordinary.
Credit Card Benefits To Look For (some benefits may vary on the card)
Credit cards typically come with benefits, which other than points can include:
- Protections on purchases, like extended warranties on electronics
- Emergency medical insurance
- Flight delay insurance
- Trip cancellation insurance
- Baggage delay insurance
- Lost or stolen baggage insurance
- Car rental theft and damage insurance
- Travel accident insurance
- And more!
While these are not as advertised as cashback, miles, interest rates or points, they can provide a lot of value if you use them correctly. Before signing up for a new card you should read the fine print of what each offers.
How to Get Your Annual Fee Reduced
Often the best reward credit cards are the cards with an annual fee. Before signing up for a card with an annual fee, do some quick math to see if you will be earning more rewards than the annual fee costs. It depends on the person but I find that personally I can only take full advantage of one annual fee card to earn more rewards than what I’m paying, but your mileage may vary.
If you decide to get an annual fee rewards credit card and have good credit and have been making your payments or have a zero balance, then you have a stronger case to getting your fee reduced or credited back to you. How do you do this? Call up your credit card company and see if they can waive the fee for being such a great customer. You can use a script like this:
“Hi there, I’ve been a loyal customer for X many years and have great credit. Times are tough so I’m wondering if you can waive my fee for this year?”
See what they say. Alternatively, some banks waive your annual fee if you have certain bank accounts with them so take a look at their offers.
In short, credit cards can be a valuable addition to achieving your financial goals by maximizing your reward points. From savings on extended warranties, and insurance benefits, in addition to building up your credit score, credit cards should be thought of as another weapon on your fight against debt which may sound counter-intuitive but start small and go from there. However, credit cards are not for everyone. If you find you’re spending more as a result of having a credit card, lower your limit or cancel it. And if you are making a purchase on credit that you know you won’t be able to pay back by the end of the month, chances are you can’t afford it in the first place. But used in the right hands and you become that much closer to being debt-free with the power of a credit card.
Legal Disclaimer: The views expressed by Mr. Dumont on Money Sensei are solely his and not intended as investment advice nor a guarantee of any financial return. Mr. Dumont is not an investment or tax professional, so the information contained on the blog is not a substitute for professional advice. The contents of this blog are accurate to the best of his knowledge at the time of posting, but rules and laws are ever-changing. Please do your research to confirm that you have the current information.