One of the more common questions I am asked by clients during the discussion of debt is “Should we be using credit cards?”
If you have ever watched any of the personal planning shows on TV, you would hear Dave Ramsey, Suze Orman and others typically dismiss all credit cards is bad debt and never to be used. The reality is, this is yet another example of why blanket advice is not advice.
The reality is, as long as you are financially responsible to yourself, there is no reason to use “smart” credit cards.
What are “smart” credit cards? Read on.In the ultra competitive banking marketplace, you can easily find credit cards that offer rewards for use. The rewards can be for banking partners such as airlines, hotels, cruise companies, etc., or reward programs offered by the bank that can be redeemed for anything, such as Capital One Rewards, Chase Ultimate Rewards, American Express Membership Rewards, etc. Some of the bank offered rewards can even be straight cash back, such as Discover’s and Barclays.
Now, in lieu of all the perks that you receive, the banks do have to cover it somehow, and typically that translates into either higher interest rates, and/or annual fees. The interest rates will typically be 15% APR or more, and the annual fees can be as littles as $0 or as high as $400 per year, depending on the issuer and the perks that you receive.
For the most frugal out there, the best bang for the buck will be credit cards that offer cash back, and give you more cash back on certain categories, such as utilities, groceries, pharmacies and gasoline. You will typically get 1% cash back on every purchase, and anywhere between 2% and 4% on the specific categories.
There are people out there that make it a game to get as much rewards as possible, that they will try to run EVERY bill they have through the credit card, even making rent payments on credit cards. Think of it this way, lets say you get an average of 1.5% of your annual expenses back , for most families that is a decent chunk of change. What can you do with this money? Do you want to put it into savings? Do you want to treat yourself to something nice? Maybe use this money for a family vacation?
Are you a frequent traveler? Then you can look into one of the airline partnered credit cards. These credit cards will typically give you a sizable bonus to sign up for the card, and then give you anywhere between 1 and 2 frequent flier miles per dollar spent. In short, for most people that is enough for a free round trip ticket every year. The bonuses now offered are typically 50,000 miles, enough for 2 round trip tickets.
The best perks though are often the secondary benefits offered by the airlines for their loyal credit card users. Delta for instance, will give credit card holders 1 free checked bag per person on the reservation, saving you $25 per checked bag, Priority boarding ahead of other coach class ticket holders, discounts on in flight purchases and discounted entrance to the Delta SkyClub lounges. United offers most of the same benefits but even has credit cards that allow you access to any United club lounge, as well as potential upgrades on award tickets. US Airways with their credit card offers a discounts the amount of miles required for an award ticket, from 25,000 miles down to 20,000 miles.
Being in NJ, we are fortunate to have a competitive airline environment so for the most part, you can buy a ticket as late as you want and still get REALLY good fares, however there are some destinations that are just really expensive, such as airports with limited services, or that are not tourist destinations. Those are the perfect ways to redeem your miles. Or maybe you want to save 60,000 miles and go on a round trip to Europe? During the summer, that can be over a $1,500 ticket, however you can get it for essentially signing up for a credit card. Or maybe you will want to save to 100,000 miles and treat yourself to a ticket to Fiji? Or maybe fly to Europe in Business or First Class?
Travel credit cards, even though they may not be as good as cash in your pocket, the benefits provided by travel cards can be priceless to a frequent traveler. As far as frequent flier miles? Don’t think they are worthless, in fact, they are often a big sticking point in divorce cases of the affluent. =) For people who redeem miles, they will typically place a value of approximately 2.5 cents per frequent flier mile, based on the costs of tickets they would be redeeming them for, had they paid for them.
Don’t have a preference for airlines but love your hotel brand of choice? How about a Marriott credit card that gives you enough points for 2 days at a Ritz Carlton?
Think of it this way, you can get a guaranteed 2% pay increase, HOWEVER, if you show up to work late, more than once, you will pay an additional 15% in taxes.
This is what credit cards represents. They offer a ton of rewards, however it all hinges on the fact that you would be paying off the balance in full when the statement comes. The fact is, even if you get 2 cents per dollar back on a cash back credit card, or value your airline miles at 2.5 cents per mile, it pales in comparison to the high interest rates you would be paying to carry the balance.
If you either do not use credit cards, do not carry a balance, or pay for all your purchases in cash or from a debit card, you should absolutely be looking into giving yourself some extra security and perks, some extra cash back, or at the very least, be able to treat yourself to a nice trip. It is literally free money in your pocket at the end of the month.
If you carry a credit card balance, no amount of perks will be able to make up for the interest rates you are paying on your credit card, and as such, your first priority should be to find a card to do a balance transfer or to get the lowest rate possible on that debt. Now, while some reward credit cards offer introductory 0% interest, or balance transfer offers, more so than not, the rates on reward credit cards will be higher than a GOOD credit card with a super low every day purchase rate.
Over the next few weeks I will research the current offers and list them here. If you have any questions, feel free to reach out and ask.
So where will your miles take you?
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