The following is a guest post from Mr Credit Card, who is going to highlight how credit cards can be used to save money
There are many people who carry a balance on their credit card every month. If you are one of those people, this article is not for you. Unlike you mortgage and student loans, credit cards have a high interest rate and the interest paid not tax deductible. Using a credit card to finance purchases is the opposite of saving money.
If you are one of the many people who always pays their credit card off in full and on time, keep reading. I am constantly meeting people who are otherwise frugal, but are not maximizing their savings by using a reward card (ie they are not using the best credit card for their circumstances). Some write checks, use cash, pay with debit cards, or just use a non-reward card that they have held for some time.
A far greater number are just using any old reward card they have, and haven’t considered if that card is still the best one currently on the market.
Save Money On Everything
Almost everything you pay for can be put on a reward card. Let’s say you are earning the equivalent of 2% back for every purchase. 2% sounds rather trivial, or does it? If you spend $30,000 a year ($2,500 a month) on your credit card, that is $600 saved. Since the cash back is a discount, not an earning, you don’t pay taxes on it. Another way to look at it is that you are getting approximately the same post tax benefit as you would if you received a $900 a year increase in your salary. All of the sudden, 2% sounds pretty good.
The Catch
First, you have to separate your rewards from the entire thought process of spending. You can never think about the reward as an incentive to spend. Remember, you credit card is just a convenient method of payment, not a way to get rewards. If the thought ever crosses your mind to spend more to get a reward, you should not be in the reward card game.
The next catch is truly getting your 2% or better. Many cards offer 1% cash back on all purchases, with others providing 3-5% back on spending with different merchant categories. Some cardholders prefer rewards in the form of loyalty points that can be redeemed for travel services or merchandise. Just make sure that the reward is for something that is worth 2% or more of the spending it took to earn the points or miles.
Rewards To Savings
If you were truly planning on spending your cash for something that you earned an award for, that the savings are absolute. When you earn cash back, again you have definitely saved money. To segregate your savings from your spending, some people opt for reward cards linked to savings or investment accounts. For example, the Fidelity Investments Visa card gives you the equivalent of 1.5% cash back into your investment account, up to $10,000 a year. After $10,000, you earn an outstanding 2% cash back. For high spenders, that is difficult to beat. Schwab bank used to offer 2% a cash back credit card, but they no longer do.
Other Ways To Save Money With Your Card
Never overlook the fact that you credit card offers you up to 50 days of free interest. Know when your statement closes every month, and try to make large purchases the following day. For example, if your statement closes on the 15th of September, a purchase made on the 14th will be due on or about the first week of October. If you hold off on your purchase until the 16th of September, your payment will not be due until the first week November, giving you an extra month of interest on your money. It should go without saying that you will receive no benefit if you do not pay your balance in full every month. Finally, be familiar with the details of all of the extras that come with your card, such as warranty extensions, purchase protection and rental car coverage. Taking advantage of these offers is yet another way to leverage your credit card towards your savings goals.
We use our credit card to rack up points and rewards and paid it off within a month to avoid the interest charge. On our most recent travel, we saved almost 50% on our hotel by redeeming those rewards. However, we just need to be careful on ensuring that we really pay it in the same month and do not fall into a trap of overusing it. I think the interest charges would pretty much offset any rewards we could gain.
Use a card for almost everything, Pay in full at the end of the month. Use rewards to get gift cards for stores we shop at anyhow and then buy household expenses with the rewards cards (ie Target, Lowes, gas etc). That way, we’re not using rewards to splurge, but for regular expenses.
not when you use it as a limiting selection