I love credit cards. Not because I’m a woman and we’re conditioned at a young age to love them, but because of the way that I can utilize a credit card with bonuses. Cash back, airline miles, online shopping bonuses, sign up bonuses, you name it. I love a credit card with any kind of bonus.
There are a few different kinds of “bonuses” that you get from using credit cards for everyday spending, instead of cash or a debit card. I know this kind of thinking can be frowned upon by many financial advisors (pretty sure everyone in that Dave Ramsey Financial Freedom course would be pushing me out the door for even writing this).
So let me emphasize everyday spending, not big purchases that we don’t actually have the money for. That’s bad credit card spending. As long as you are disciplined with your budget and pay the card off every month, this is a great way to get free perks, build your credit, and get a little safety against fraud.
The Free Stuff
Getting right to the point, I love credit cards for all the free things they give to me. Dave and I have been able to travel very cheaply using miles cards and cash back cards – see how we paid a total of $44 for a vacation for two to Fort Lauderdale. We’ve also used cash back bonuses to help build up our savings.
Cash Back – So Simple, Yet So Awesome
I’m not going to beat a dead horse with this one. Cash back bonuses are self-explanatory. You use your credit card for purchases and you get a certain percentage back as a cash bonus. The higher the cash back percentage, the more you get back.
But a cash back credit card is not a hall pass for a spending free-for-all. You won’t make a ton in bonus cash. I’ve had a Upromise credit card for years now and have been really good at getting extra online shopping bonuses along with my cash back. With that said, I’ve just recently hit the $1,500 threshold in cash back bonuses.
Upromise currently pays 1.25% cash back. Let’s forget about the online shopping bonuses to keep the math simple. With 1.25% bonus percentage and $1,500 in cash back on the card, that means that I’ve spent around $120,000 on that card since I’ve opened it.
That is so much money. But it’s still money I was going to spend anyway and the $1,500 was sent directly to my savings account where it stays in case of emergencies.
In the years that I’ve spent that $100k+ balance, I’ve never paid any interest or late fees. So really, that’s $1,500 in free emergency fund money. I’ll take it.
In addition to my personal card, Dave and I also have one joint credit card – we’re the weird couple that keeps our finances very separate. We built up our cash bonus on this card pretty quickly due to improvements on our home – that’s why we call her the Blue Beast. We have our bonus cash earmarked for the hotel cost when we stay in Fort Lauderdale for my brother’s wedding. Free stay at a Hilton? Yes please.
A Miles Card – Even Better Than a Cash Back Card (IMO)
I’ve used miles credit cards a ton in the past. I’ve gotten cheap airline tickets to places such as Aruba, Las Vegas, Tahoe, and soon to be Florida. And I still kick myself for not opening up a Delta miles card when I took a tour of Kenya with my church – seriously, I would have gotten 40k miles in bonus miles for the amount of money spent and then miles for all the flights we took! If only I knew what I know now…
Miles cards are extra special because of the sign-up bonuses. Dave and I aren’t typically worried about our credit (more on that below), so we have no problem signing up for a miles card, spending to get the mileage bonus (love gift cards for this one), and then closing the card before any annual fee comes due.
There are a ton of travel cards to choose from so you can choose one that fits how you travel. If you fly Delta a lot, take a look at a Delta specific card. The same goes with hotels since many are now offering the same type of rewards programs as airlines. Dave and I tend to fly with whomever is cheapest, so we typically choose a generic-type of miles card – whichever has the best sign-up bonus as we are not ones to be loyal to companies.
Building Up That Credit Score
I know that the way Dave and I deal with opening and closing a credit card is not the best for your credit score. New credit can account for around 10% of a credit score, where opening new lines of credit can hurt you. But we already own the things that you would rely on a good credit score to get, like a house purchase/rental or a car.
If you do need to boost your credit score a bit, this is still a good way to do so but only with a little tweaking. You’ll want to make sure you find a card that does not come with an annual fee because you are going to want to keep the card open. You’ll also want to pay the balance off every month – absolutely no exception!!!
Payment history tends to make up 35% of your credit score. I’ve scoured the internet and in every credit score calculation I’ve found, the biggest weighted factor is payment history. To get credit card bonuses for free, you can’t pay interest on balances or pay late fees. This means paying everything off as it comes due and paying on time. It’s the discipline that will end up perfecting your credit history.
The final way that opening and using a cash-back or miles credit card (or any other credit card for that matter) to increase your credit score is by improving your credit utilization. Your credit score will weigh how much money you owe against how much credit that is available to you. Increasing the amount that is available to you will boost this score.
This doesn’t mean that you should go and open up fifty credit cards to increase the amount of credit that you can use. There are other factors that make up your credit score that will account for this, like new credit and length of time of accounts. Don’t go overboard, there are better ways to improve your credit, like simply paying things on time.
General Safety of a Credit Card
Safety is always the perk of credit cards that gets overlooked. I, myself, never really thought about it until I sold my condo and had a large cash balance in the account linked to my debit card. If I were to use my debit card at a store that was then hacked, the hackers could use my debit card information to get their hands on all of that cash.
I quickly moved that balance out of that account (and into a final payment for my student loans). But not before making a note to myself to not use my debit card if I can help it.
Credit cards, on the other hand, do not pull money directly from a checking or savings account when you make a purchase. And many credit card companies now have controls in place in an attempt to stop fraud such as spending trackers.
My credit card company knows that I live in Boise, ID and don’t spend money on online games, so if a charge comes through for $50 for an online gaming purchase from Atlanta they send me an email. Then I can tell them that wasn’t me and we go from there.
Any Potential Downfalls?
If you do decide that you want to lean more on credit cards over cash or debit cards, then you should know that there are a few things you want to look out for.
The first is the biggest: do not keep a balance on your credit card. Pay that sucker off each and every month! If you are paying interest on a balance, then the bonuses are not free and you are better off paying in cash.
The second is the fees. Keep an eye out for annual fees as those are much like paying interest and can negate any bonus you may get from using the card. Foreign transaction fees can also be a pain if you plan on using the card in another country. Just be sure you are aware of any fee that you may be charged so you can avoid them.
The only fee you should not be too concerned about is a late payment fee. Because you will be making on-time payments…right?
The last thing we hit on a bit already, which is the hit to your credit for opening up a new credit account. I don’t worry too much about this one since I do not have any current plans to open up a large item credit account. We already have a mortgage, and we pay cash for cars. I’m not going to lose any sleep if our credit score drops a bit so we can fly somewhere for super cheap.
But that’s me and my situation. You should always assess your individual situation before making any financial decisions.
Yep, I Still Love That Plastic
Making credit cards work for you will take a little planning. There is a lot to consider when looking to open a new card simply for the perks: what are your plans for the bonuses you will get, which card offers the best perks with the lowest fees that will get you what you want, is opening that card the best thing for your credit score situation.
But whether we are using a card that gets cash back bonuses or some free airline miles, credit cards are our family’s go to when buying just about anything. We use them strategically and we make sure we never carry a balance on any card we may have.
Our strategy for credit cards may or may not work for you. It all depends on how you want to handle your finances and if you can be disciplined enough to pay off your balances each month. If you are considering switching over to credit cards and want to talk through the pros and cons, please feel free to reach out to me. I love talking finances and getting things for free!