Ours is a credit-saturated society. The credit card industry is big business, and everyone has a card (or cards) in their wallet. Swiping a credit card is much easier than paying cash, and on some psychological level, it may not even feel like you’re spending money at all. But remember the cardinal rule of capitalism corporations are not in the business of charity. Credit card companies don’t let you use their money for their emotional well-being. They want you to overspend, to max out your cards, to make the minimum payments, and to rack up massive finance charges. If you use credit cards poorly, they can be a terrible burden. However, if you use them wisely, they can be wonderful tools.
Credit cards with rewards – cash back bonuses, hotel points, airline miles – are becoming increasingly more common and easier to obtain for the average consumer. But you must be careful with how you use these cards. Remember the capitalism rule – if these companies weren’t making money on them, they wouldn’t offer them. The American Bankers Association recently found that almost 60% of consumers carry a balance on their cards from month to month. That means only 4 out of 10 Americans pay off their cards on time and thus avoid costly finance charges.
The reason companies can afford lending to those first 4 is that the other 6 make up the difference, and then some. The first and most important rule to maximizing the power of your rewards cards is to be one of those 4. Pay off all your cards, every month, and you can avoid the snare of finance charges. It makes no sense to use a card with a 3% cash bonus if you’re paying back 17% in interest.
My wife and I have a card from USAA that pays cash back at a rate of 1%. We always pay the bill on time, in full, and redeem our cash back in the form of gift cards. Last December, we paid for $400 of Christmas presents with those redeemed rewards, and we didn’t pay a dime in finance charges. USAA lost money on us, but we were in the minority. You can be, too.
The second rule of rewards cards is, do not sign up for a card you otherwise wouldn’t just to get the rewards. Many airline cards have high interest rates and annual fees, which can quickly overwhelm any financial benefit you might see. You’ll also be tempted to overspend on the card just to get the rewards points. Our USAA card replaced all previous forms of credit, and we only use it on bills and expenses that were already in the budget. Don’t ever exceed your normal budget just to cash in on rewards. It won’t be worth it in the long run.
A corollary to that second rule is this: don’t ever buy anything just because you’ll get cash back. Never use the card for anything you couldn’t afford with cash. If you can’t afford it, you’ll pay finance charges on it, and you’ll pay much more in interest than you will get back in reward points. Getting 1% back on that new plasma screen might seem like a good deal, until you start paying ten times that in interest.
The final rule for maximizing the benefit of your rewards is to use rewards before they expire. This seems obvious, but some people don’t use their miles on time and lose them. Check with your credit card to make sure of the expiration dates on your rewards.
It doesn’t take much work to get the most out of your rewards cards. With some financial discipline and self-control, you can use these juicy rewards deals to make your credit card companies work for you, not the other way around.