Credit Cards–Friends With Benefits?
Whipping out the plastic doesn’t sound like the best way to save money, but if used correctly, credit cards can play a role in stretching your budget and getting the most from your money.
The basic premise is to use your credit card as you would cash in your wallet. Don’t spend what you don’t have, in other words, and then pay off the full balance when it’s due. But even those of us who carry a balance can take advantage of credit card rewards that can help soften the blow from paying 25 percent interest!
Say yes to cash back
A host of cards offer cash back for every purchase you make, but the best ones give you even greater incentives for certain types of spending. The basic cash-back features typically pay one percent of annual spending on anything charged to the card. But others, like the Chase Freedom card, hike the percentage to as much as five percent for shopping with certain retailers or on certain types of purchases (like groceries and gas). Several also pay a cash-back bonus for spending a certain amount in the weeks and months after opening the account.
Beware of “no-interest”
It’s hard to ignore the ever-present offers for balance transfers where “no interest” is charged for 12 months or more. If you carry a large balance on a card with a high-interest rate, transferring the balance could pay off big. But beware: few things are actually free, and money is certainly one of them. While the credit card company won’t charge you interest, they often charge an upfront fee for transferring a balance (typically 3% of the transfer, with a $5 minimum). Whatever the percentage, it has the same effect as interest: it costs you money to borrow money. When shopping for a balance transfer deal, look out for the rare deals that let you transfer with a fee. Recently, the Chase Slate card offered no-fee balance transfers within the first 30 days of opening the account (check regularly for new terms).
Don’t pay until you have to
When someone loans you money with no-interest, is always the best financial plan to pay it back at the last possible minute. The same is true for credit cards. Whether you send the bill by mail or, better yet, set up an automatic payment from your checking account, pay on the due date, and not before. In the meantime, keep your money in a high-yield savings or checking account (in effect, you’ll be earning money to use a card!) But make sure those payments do arrive on-time–a late fee will quickly wipe out the money you’d otherwise earn (and then some).
Shop with you card, on your card’s site
Many credit card companies set up special deals for their customers with online retailers and service providers like cell phone carriers. But to take advantage of them, you likely need to sign up for the program and shop through the credit card’s site. Bank of America’s “Add It Up” is one example. It includes deals from companies like Apple and 1-800-Flowers.
Maximize your points
As a general rule, don’t use your credit card points for things like flat screen TVs or a combo recliner-massager. Airline, rental car and hotel deals tend to get the most for you points, but even those can get complicated. For instance, the highly regarded American Express Starwood Preferred Guest card charges different amounts of points for different types of hotels, from budget to luxury. But sometimes the numbers don’t add up. A recent search found a room in a “moderate” hotel cost 4,000 more points than in a basic one. But the rooms cost the same dollar amount for the chosen dates. In other words, the points for the moderate hotel were less than half as valuable as those for basic hotel. Sometimes, it’s better to just pay cash.
Matthew Malone is a staff writer for RothIRA.com, a leading retirement and Roth IRA resource. Matthew is also a contributing writer to CBS SmartPlanet. His work has appeared in The New York Times, Cosmopolitan, Smartmoney.com, Fortune.com, Forbes.com, and other publications.