Personal finance pundits would advise against the idea of using credit cards as the primary means of payment — and rightly so. But if used smartly, the plastic can have huge advantages over using cash.
Buy an iPad for your partner, pay for your turkey dinner, book a flight to visit your grandmother, and you might end up gifting yourself as well. If you use your credit card responsibly and smartly, you can easily maximize the bang for your buck.
Before you feast on the rewards of credit cards, it’s worth knowing the risks they entail. Many people are fascinated by the charm of what appears to be “free” money. Studies show that consumers spend more when they pay with credit cards than when paying with cash. To avoid, set a spending limit based on what you can afford to spend each month.
Make sure you pay the credit in full each month to avoid paying interest. Each time you borrow the money you are creating debt. The more you borrow without repaying, the deeper you sink into debt.
With a bit of discipline, smartness, and responsibility added to the following strategies, you can maximize the benefits of credit.
1. Take advantage of discounts at associated stores
Most credit cards have a network of associated businesses that offer discounts and promotions for using their service. The most common categories are entertainment, restaurants, travel, and fashion.
Every bank has an exclusive network of associated businesses. Usually, this information is available on the bank’s website. Many of them have an app to see the discounts and promotions.
Having two credit cards can be beneficial. First, because you can expand the network of associated businesses that you can access. Second, because some cards offer higher discounts than others. You can pick which items to pay with which card.
Also, look out for newsletters and promotional emails from your credit card company. These may appear to be junk emails and you are likely to be sending them to the trash without even opening. But sparing a few seconds might open doors to exclusive promotions for your credit card.
2. Leverage interest-free period to buy durable goods on instalments
The common notion is that the interest charged by credit card companies eats away all the rewards, points, and discounts they offer. But not now. Many credit cards offer a grace period where they don’t charge you interest for a specific period of time. The interest-free period varies from 3 to 24 months depending on the type of your credit card. This allows you time to pay for things that you can’t buy on a single payment or delay the payment to maintain a balanced cash-flow.
In addition to the credit card offers, there are partnerships between certain merchants and credit card companies that offer 0% financing. On the one hand, consumers can break down their large payments to small investments without paying anything extra. On the other hand, businesses can sell much more than usual as this encourages customers to buy more. Win-win for all!
However, make sure you read the terms and conditions properly. Have a minor slip-up and you will end up owing hundreds in fees and interests. The 0% financing might only be applicable for a certain amount and might involve an additional fixed fee. For example, the “Plan It” option of American Express offers zero interest installments but charges a fixed monthly fee.
3. Use the points, miles, and cashback on your card
Every time you make purchases with your credit card, you accumulate points and miles, which you can later exchange for shopping, dining, flight tickets, or even cash. The points and miles are part of the loyalty programs of the banks, which reward the use of their cards.
Usually, one point is accumulated for every dollar spent with the card. However, some cards have special provisions that allow you to get additional points in certain situations. Brand cards can offer more points for purchases made by that company. For example, a credit card associated with an airline or a private hotel will offer more points for every dollar spent directly with the airline or hotel. In addition, some credit cards offer different point benefits based on certain expense categories, such as offering more points for every dollar spent at gas stations or grocery stores.
Similar to points and miles, another advantage is the “cashback” offered by many business credit cards with rewards. A small percentage of the card’s net spending (purchases minus refunds) is returned to the cardholder as an annual, monthly or campaign reimbursement fee in the form of a credit card payment reflected in its balance sheet.
To maximize the benefits of points, miles, and cashback, maximize the use of your credit cards. But don’t fall into the trap of the trade by spending more just because of points and miles. Credit card payments should be the substitution of cash payments, not the addition.
4. Get covered with insurance and guarantees
If you have traveled by air and missed a connecting flight, you already know the fear. What to do if there are no other suitable flights? An uncomfortable option is to camp on the airport floor until something is available. If you’re lucky, the airline might get a few bunk beds. But if you bought your ticket with any of the several credit cards, including the Chase Sapphire Preferred or Hyatt Visa, you could reserve a room on your own knowing that your credit card issuer will pay the bill.
You can also make use of the ‘protection against price fall’ benefit that relieves the pain by reimbursing part or all of the difference. Barclaycard, Chase, Citi, Discover, and MasterCard offer some version of that offer.
Many consumers have no idea that credit cards can help cover the cost of a new mobile phone if it is damaged or stolen. A Wells Fargo credit card, for example, will give you up to $600 of protection. In case of theft, you must present the police report or other documents to prove that your phone was stolen.
There may be restrictions and fine prints: your flight must be delayed for more than 12 hours, for example, or require an overnight stay to claim the connection loss insurance. Some items like jewelry are not included in the price fall insurance and most cards have a cover limit.
It is worth mentioning again that being disciplined by always paying your card before the due date and planning your expenses is mandatory for these tips to work for you. With responsibility and consistency, you can also be an expert in reaping maximum benefits from your credit card. Do you use any other credit card trick that works for you?