First off, you will build up debt if you can’t pay your bill in full each month. Further, using credit can make it harder to stick to a budget since you can charge purchases now and worry about payment later. Several studies have shown that using credit causes some people to spend more than they would otherwise. But if you can stay disciplined, there are a lot of benefits to using rewards cards. Here are a few tips you should follow:
1. Tie Your Cash-back or Travel Credit Card to Your Monthly Budget
Using credit cards without a plan is probably the worst idea ever, but you can stay on track if you use your credit cards as part of the monthly budgeting process. Let’s say you budget $700 for groceries every month and $300 for gas. Using a cash-back credit card for these purchases could net you 2% back or more, but you need to make sure you don’t overspend due to the convenience of credit. To make sure credit is working for you and not against you, you should use your credit cards for these purchases to earn rewards, but check in with your budget periodically to make sure you’re on track.
2. Pay Your Credit Card Bills More Than Once per Month
Paying your credit card bills more than the required once per month will cause money to leave your bank account sooner, which will make it easier to stay on track with your monthly spending plan. As a bonus, regularly paying your credit card bill may help your credit since keeping a low balance will lower your credit utilization—one of the main factors that determine your credit score. So even though you are making a lot of purchases with credit each month, the fact that you pay your bill multiple times per month should keep your utilization lower than it would be if you paid your bill just once per month. Fortunately, the bulk of rewards credit cards come from banks that offer easy-to-use online portals where you can check your balance and pay your bill any time you want.
3. Track Your Spending Religiously
Unlike cash, credit creates a paper trail you can use to your advantage. It’s easier to watch your spending against your monthly budget when you have a record of your purchases, allowing you to verify that you are on track for the month. If you’re worried about making this strategy work yourself, you can sign up for a service like Mint or Cinch Financial so you can track your spending online at any time.
4. Only use Credit for Purchases You Plan to Make Anyway
People often see credit as a permission slip to overspend. If your new rewards card has you tempted to update your living room furniture or dine out incessantly to rack up extra points, that’s a sign credit card rewards may lead you astray if you let them. Ideally, you’ll want to use credit as if it were cash and only for purchases you planned to make anyway. For example, if you’re changing apartments and need to pay the movers, that’s a good time to whip out your credit card. You can also use the card for groceries, be mindful that you may be tempted to buy that premium cut of steak with a card when you would be more frugal with cash.
5. Take Advantage of Valuable Consumer Protections
Many credit cards come with plenty of consumer protections. Credit cards offer higher fraud liability for starters, meaning you may be off the hook if someone uses your card or card numbers to make any fraudulent purchases. Some rewards cards also come with perks like extended warranties, purchase protection, and guaranteed returns. Also, the best travel credit cards tend to come with travel-related benefits such as trip cancellation/interruption insurance, auto rental coverage, baggage delay insurance, and travel accident insurance.
6. Pay Bills With Credit to Rack up as Many Points as Possible
Finally, the key to getting the most out of your rewards credit card is using it for as many bills as possible. You may be able to use credit to pay for bills such as:
DaycareHealth insuranceUtilitiesAuto insuranceHomeowners insuranceCollege tuition
If you can pay your expenses and bills without a fee for doing so, pay your credit card balance in full, and avoid debt, you will end up ahead thanks to the points and miles you earn. Of course, this is only true if you can use credit to your advantage and avoid all the ugly pitfalls of credit and debt.
Final Thoughts
Can you benefit if you use credit for the bulk of your purchases every month? Absolutely. Will you benefit? That depends on whether you have the discipline to pay your bills religiously and never use credit as an excuse to overspend. Only you can decide whether earning 1% to 5% cash back or travel rewards are worth the trouble and the risk.
