Get More Value for Your Money with Smart Credit Card Use
Thursday, October 16, 2014, 1:00 AM | Leave Comment
According to the Census bureau, 176.8 million Americans have at least one credit card, and the average person has three or four. It’s wonder, then, that so many people end up having credit problems. There’s a lot you can do to not only avoid the potential pitfalls of using credit, but actually put your credit to work for you, and get more out of your credit cards.
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Make Some Ground Rules, and Then Stick to Them
To use credit cards effectively it’s important to set—and stick to—some rules. Otherwise, you risk debt and interest payments that negate the potential benefits.
The number one rule for using credit cards wisely is to avoid paying interest, by paying off the balance every month, or in the case of cards with a zero-interest period, before that period expires.
This is especially important with rewards cards, because they typically have higher interest rates than cards that don’t have reward programs, and also because paying interest on those cards cancels out the benefits of the rewards.
It’s also important to make some decisions on what you’ll use your credit for. One of the biggest traps that people with major credit card fall into is making impulse purchases that they wouldn’t otherwise be able to afford.
The best—and safest—way to use credit cards is to use them to buy things you’d be buying anyway.
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Use Two (But Only Two) Cards
Having even one card can be a bad idea if you have a hard time using it without getting into more debt than you can afford, but if you’re a disciplined shopper, having two is a great way to get more value out of your credit.
With two credit cards, you can use a high-interest rewards card for everyday purchases, and use a second low or zero-interest card for large purchases.
The second card can even serve as a source of immediate cash if you choose the right one. Sometimes it’s more advantageous to borrow money, but if you need cash in the short term, using a zero-interest credit card can be a much better way to get it.
The key to maximizing your benefits is to use the rewards card as often as possible—while still paying the balance every month—and using the second card only for specific big-ticket items like electronics and appliances, that you plan to pay off before the interest is due.
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Choose and Use Your Rewards Card Wisely
The obvious way to choose a rewards card is to sign up for one that’s offering rewards that you actually want, but there’s more to it than that.
It’s also important to look at the value of the rewards you can earn, and compare that value to the costs of having the credit card.
For example, if you choose a cash-back rewards card that offers 1% cash on purchases and has an annual fee of $50, you’d need to spend at least $5,000 in a single year for your cash reward to pay for the fee.
If you don’t spend at least that much you’re not actually getting a reward, because the money you get back is negated by the annual fee.
Aside from choosing the card, the other important factor in maximizing its value is how you use it: essentially, you need to use it as often as possible, and pay the outstanding balance every month.
The best way to use a rewards card is to use it for everyday expenses like gas and groceries, and any other purchase that you’d otherwise pay cash (or use your debit card) for.
The more you spend, the bigger your potential rewards—but paying off the balance every month is essential too, otherwise you’ll be paying interest that will negate the value of the rewards you earn.
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Read the Terms and Conditions
The terms and conditions of a contract is arguably the most important part of the whole document, but it’s also the part that most people skip reading.
Reading and understanding the terms and conditions is crucial if you want to get the most out of your credit cards, because this where you’ll find the most up-to-date information about how they work: credit card expiry dates for rewards and reward points, the grace period for monthly payments, minimum spends, and reward-to-spend ratio (the amount of rewards value you get per dollar spent).
In short, credit cards are best used wisely and with discipline—that’s the key to getting the most value, and to avoiding the problems that come with overspending.
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