Let me start by saying this advice applies to people who have the discipline and means to pay off their balance every month. I can’t stress that enough. Credit card interest rates are sky high and any interest paid offsets the benefits I’m about to detail. With that being said, I believe that prudently using a credit card represents one of the easiest ways to boost your personal finances. I believe that as much as I believe that using your debit card is actually a detriment.
This is the biggest one for me. In today’s world thieves are coming up with more elaborate ways of swiping the digits on the front of your card. It’s safe to assume that at some point your account will get compromised. For me, it was somebody using my card to take an Uber in Ottawa. If I didn’t catch that, I’m sure the perpetrators would continue to press their luck with bigger ticket items. All it took was one call to the fraud department and a new card was issued and rushed to my house. The fraud department worked behind the scenes to confirm it was not me. Contrast that with a debit card. A compromised account could mean direct access to your hard-earned cash. To make things worse, the bank could freeze the entire account while they investigate, leaving you without any money.
One of the main inputs into your credit score is the ratio of outstanding revolving debt to the total available credit. Another is length of credit history. Routinely using a card and paying it off demonstrates to the bank that you are a reliable patron, and the bank will raise your credit limit over time. Obviously, they are not doing this out of the kindness of their heart – they are hoping you will spend more and start paying less than the minimum. Sneaky. Anyway, keeping a healthy relationship between your debt and your limits will serve to improve your credit score which saves you money on car loans and mortgages.
The fun stuff. This is where you can see with actual dollars and cents the fruits of your allegiance to a certain card. As you purchase things, your card company will reward you with points which can be exchanged for goods and services or cash back into your account. If you play your cards right (pun very much intended), you can maximize the amount of points you earn by using different cards for different items where there might be a points multiplier. For example, I use one card for gas where I get 2x points and a different card for restaurants where I get 3x points. Cards will also run special promotional offers so keep an eye out for that. If you are unsatisfied with your current card, keep your eyes peeled for special offers for sign up bonuses. (If you want to shop around, www.nerdwallet.com is a good site to compare different card offers.) One of my cards offered 100,000 points to sign up and spend a certain amount of money in the first few months. That’s a $1,000 reward for simply filling out an application and going about my normal spending!
This might be obvious to some people, but I feel like a decent amount of people still use their debit card or <whispers> write checks. To reiterate an earlier point, this is not for everybody. Make sure your spending is in line with your budget and pay off your balance every month. From there, just sit back and watch the points roll in.
Author: David Rath, CFA
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