Jamie Cattanach is a personal finance and frugality writer who spent over a year on-staff with The Penny Hoarder. Here, she discusses her seemingly-counterintuitive decision to make all of her purchases using credit.
Relying on credit cards isn’t often seen as a smart money move.
But as a personal finance writer, I consider myself fairly money-minded. And whether I’m picking up my well-couponed grocery haul or allowing myself an occasional splurge, I pay for just about everything I buy with credit.
There’s a method to my madness.
Just this week, my bank cut me a check for $300 and deposited it directly into my account, all thanks to my habit of swiping—or more recently, inserting my card chip—for every cent I spend.
That’s because I use credit cards with cash-back rewards to earn a percentage back from each of my purchases. And since I’m smart about it, it’s basically a cash reward that I can use however I want.
But if you’re not careful, credit cards can wreak serious financial havoc. So I’m going to share exactly how to best capitalize on rewards structures without putting your hard-earned money—and credit score—in peril.
What is a Rewards Credit Card, and How Does it Work?
If you’ve ever gotten an enticing-looking credit card promotion in the mail, you may have asked yourself: “Well, should I use a credit card? How do cash back credit cards or miles rewards work in the first place?”
Much of the messaging from smart money bloggers and other sources would caution you against taking advantage of even wonderful-looking credit cards, and for good reason. If you can’t trust yourself not to spend more than you make, you will window up in debt–especially considering how some cards have 20%+ interest rates, which are no joke!
But credit card users frequently fall into bad spending habits. Use them wisely so you will actually benefit from your credit card’s offers—while avoiding potential pitfalls.
The secret is simple: Read the offer details carefully, and make sure its rewards work for you. Then, use your card — but pay your whole balance off, every month, in full, on time.
Still a little nerous? No worries. I’ll break it down for you in detail.
The Best Ways to Use Rewards Credit Cards Without Ruining Your Finances
Credit cards are actually one of the smartest and simplest financial tools at your disposal… provided you wield them correctly.
Here are five simple steps for how I use cash-back credit cards to effortlessly earn extra money. You can do this, too:
1. FIND THE RIGHT CARD FOR YOU.
First things first: Get the right credit card in your wallet before you start using it to reap financial benefits.
What is a rewards card? There are all sorts of options on the market, offering everything from cash and gift cards to frequent flier miles. The credit card with the best benefits will depend on your lifestyle and personal preferences. Cash-back rewards are my personal favorite (after all, you can turn cash into any other “reward” you want!), but I do also have a few cards from airlines so I can passively collect miles.
This might sound obvious, but not all rewards programs are created equally. Look for a card that offers as much cash back as possible in a way that matches up with your spending habits. For instance, some offer more cash back with certain retailers, while other cards break rewards into different categories, like grocery or dining purchases; other cards offer a bonus if you meet a certain spend threshold within a given amount of time.
Once again, take your purchasing habits into account when considering these products, and be realistic. If you sign up for a card that ties a cash back bonus to spending $3,000 in three months, but aren’t already planning to spend that much, then it’s probably not a good match for you.
Ideally, your card won’t carry an annual fee. If it does have one, ensure you’ll spend enough that the value of your reward amount will outweigh that fee.
For example, let’s say you find a rewards credit card that offers you 1 percent cash back but carries a $95 annual fee. Even if you use that card to spend $9,500 over the next year, your rewards amount (in this case, $95) will be just enough to cover the card’s annual fee—net 0.
Finally, keep in mind that many of the cards which offer quality rewards have strict requirements when it comes to your creditworthiness. If your score needs a little bit of love, work on improving it before applying.
2. USE YOUR CARD CONSISTENTLY.
Even a 3 percent cash back reward is a pretty small fraction of your total expenditure, so it’s going to take some significant usage to build up a serious check. (That $300 I earned was after a whole year of using one card for all my regular purchases!)
Once you find the right card, commit to using it for every purchase you can in order to build up your total reward as quickly as possible; unless, of course, you have a card for a specific retailer that would offer a higher benefit. And if your card offered a startup spend bonus that’s realistic for your budget, make sure you meet it in time.
3. DON’T LOSE TRACK OF YOUR BUDGET.
This is the tricky part.
Since you’re not paying for your purchases in cash, it can be easy to spend more than you actually have. Don’t!
No matter your card’s credit limit, spend only what you have available in cash right now, or what you know for a fact you will have before the credit card statement due date.Otherwise, you’ll end up with revolving debt, which can quickly spiral out of control with expensive interest that will cancel out any rewards you might stand to earn.
Choosing a single rewards card and using it consistently keeps this step simple. Just regularly check your credit card statement online as you would your regular bank account.
4. PAY THE CARD IN FULL AND ON TIME, EACH AND EVERY MONTH.
This is the most important step in the process.
Pay off every cent you spend on credit—as soon as it’s due. In fact, I often pay my own cards as I go, as soon as each charge clears, to make sure I don’t accidentally overspend. Otherwise, any rewards I earn will be erased by interest and late fees, making the entire point moot.
And yes, you should pay in full even if your card offers a special zero-interest incentive for a limited time. It’s too easy to assume you’ll have the money to pay off that big purchase later on down the line, before it starts accruing interest—which is part of the reason Americans carry an average of over $16,000 in revolving credit card debt. Don’t be part of that statistic!
5. USE YOUR REWARDS WISELY.
Obviously, this step is optional. It’s your money, and you can spend it however you like.
But if you really want to take advantage of the credit system, use that cash for something worthwhile, like saving for retirement or paying down your student loans. Heck, even putting it toward that big trip you’ve always wanted to take (like I did!) is better than blowing it on so-so pizza or chintzy housewares that will inevitably collect dust. We’re happier when we buy experiences rather than things.
Plus, I can tell you from experience: Struggling your way through airport security is so much less stressful when you know you’re getting the flight for free.
Have fun taking full advantage of your credit card awards!
