How To Use A Credit Card - Part 2

Last week, I went over the basics of using credit cards responsibly. This week, I'll take a look at some of the more advanced things you can do with them and I'll also give a brief overview of what I do.

Advanced Topics

Rewards!

Many credit cards offer some sort of rewards, either airline miles, cash back, hotel points, or something else. The offers change all the time. There are websites dedicated to tracking the best reward cards and there are people who go to extreme lengths of maximize their rewards. Which reward card you get really depends on what you want and what you spend money on. Travel a lot and would like to travel more? Get a card that offers frequent flier miles. Just want cash back on all purchases? There are cards that offer that, with higher cash back rates for purchases at certain stores.

Most reward cards charge an annual fee. As long as the rewards you actually get are worth more than the annual fee, you're coming out ahead.

If you decide to get a card that offers rewards you want, go all out. Charge everything. Buying a pack of gum? Use the credit card! Buying groceries? Use the credit card! Renting a movie? Use the credit card! But always remember the rule: YOU MUST PAY OFF THE CARD IN FULL EACH MONTH!! Never carry a balance. If you do, the interest charges you will pay will negate and even eclipse the value of your rewards and you'll end up losing money. If you cannot pay off the card in full each month, don't use it.

Text / Email Alerts

Most all credit cards offer some sort of text or email alerts. You can set these up to remind you of a coming payment due date or to alert you anytime a charge over a certain dollar amount is made. Two of my favorites are alerts anytime my card is used but not physically present, i.e., phone or internet transactions, and alerts anytime my card is used at a gas station. Credit card thieves like to test out stolen cards at gas stations because they typically are self-service and the initial charge is relatively small. If the card works there, they then move on to larger, more expensive purchases. The gas station alert actually saved me a lot of hassle last year. I used my credit card to make a hotel reservation in Vancouver, Canada. About 2 weeks after I made the reservation, I got an email alert that my card had been used at a gas station in Canada. I was able to call the credit card company immediately and have the card cancelled and a new one sent to me within minutes of the fraudulent charge being made.

Balance Transfers

Many cards offer 0% interest or $0 fee balance transfer offers. Be sure to read the fine print of these to see if they are right for you. If you have a debt you are being charged interest on, it might be worthwhile to transfer it to a credit card with a lower interest rate. You need to do a couple of calculations here to determine this.

First, figure out how long it will take you to pay off the debt at the current interest rate. Determine how much interest you will pay during that time. Now, look at your offers. Zero interest rate offers usually charge a service charge for the balance transfer, typically a percentage of the amount transferred. Is that amount less than the interest you would pay on your current debt? If it is, and you can pay off the loan before the 0% interest rate expires, do the transfer.

Now look at the $0 fee offer. What is the interest rate and how much interest will you be charged before you can pay off the debt? Is that less than what you would pay if you didn't transfer the balance? Is it less than what you would pay under the 0% interest offer? If it is, use this deal for the balance transfer. Be sure to pay off the debt by the time you used in your calculations or you could end up paying more money, not less.

I'll do a more detailed write up about this, using actual numbers, next week.

Playing The Rewards Games

Again, there are tons of websites on how to maximize your credit card rewards. I won't get into all of the methods, but I will point out that getting the most of your rewards program does require some attention to detail. For example, some cards offer increased cash back from certain retailers or store types during certain months of the year. If you are not good at tracking little details, it might be best to go with a simple rewards program that closely mirrors your regular spending patterns anyway.

How I Do It

I have three credit cards, all of which offer some sort of rewards, plus my debit card.

1. Discover Card - This card I keep because it was one of the very first credit cards I got. I've had the account since 1989. Since 15% of my credit score is based on how long I've had accounts open, I want to keep this card. Back when I got it, Discover was about the only card that offered a cash back program - 1% cash back on all purchases. Now, they have changed with the times and offer 1% cash back on all purchases with 5% cash back from a rotating set of industries that changes each quarter. For example, this quarter, I get 5% cash back on all restaurant charges. There is no annual fee.
2. Chase Freedom Card (Visa) - The general consensus is this is one of the best general cash back cards out there, so I got it about a year ago to replace an airline mileage card. (I don't travel enough for an airline mile reward cards and mine started charging an annual fee, so I dropped it.) Like my Discover card, the Freedom Card also gives me 1% cash back on all purchases with 5% back on a rotating group of industries that change each quarter. Right now, I get 5% cash back on all grocery purchases. Last October through December, I got 5% back on all purchases at Amazon.com. Guess where I bought everyone's Christmas gifts? There is no annual fee. When I signed up, I also got a $100 bonus after charging my first $500 and no interest on charges for the first 15 months.
3. American Express Starwood Preferred Guest - This card earns me one Starwood point per dollar spent. The Starwood Preferred Guest program is one of the better hotel points programs out there. Not only can you redeem the points at any Starwood hotel (which includes the Sheraton, W, A loft, and Westin hotel chains, among others), but you can also redeem them 1-for-1 for frequent flier miles on just about any airlines. There is a $95 annual fee. I use the points for 2 to 4 free nights at hotels during the year, so I'm still coming out ahead, even with the annual fee.

The cardinal rule of credit cards is to never carry a balance. With rewards cards, you want to charge as much as possible to earn your rewards. Those could be contradictory goals, so you need to manage your expenses carefully. To do this, I use an app on my phone called Expense IQ to track all my spending. This program has replaced my checkbook and it tracks all my credit cards and bank accounts. I enter all my charges into the app and then, each Sunday night, I log into my bank's website and go to the electronic bill pay area. I schedule payments to my credit cards that cover all the charges I made that week. I schedule the payments to be made three weeks in the future, so the money stays in my account earning interest as long as possible without incurring interest charges from the credit card.

Costco only accepts American Express, so I use that card there for groceries and gas. Starting April 1, 2016, American Express is out and Visa is in, so I'll be switching to using my Visa card. Since Costco is the only place I use my Amex card, I'll have to shift my spending somewhere else if I want to continue to earn Starwood Points. I'll be watching to see if it still provides me enough value to overcome the annual fee. I know I'll at least keep the card through December 2016, as we're planning a trip to Germany and I have enough points to get our hotel for free.

The Chase Freedom Card gives me 5% cash back on grocery store purchases for the first three months of this year. I also tend to order a lot of stuff from Amazon.com, so I play the reward maximizing game by buying Amazon gift cards at my grocery store, thus getting 5% cash back on them while getting Amazon credit I would use anyway. Combined with my use of my grocery store's loyalty card, which gives me about a 30% - 40% discount on one tank of gas each month, I'm getting some nice rewards from grocery shopping!

The zero interest rate for the first 15 months also is proving to be a huge benefit. I recently remodeled my master bathroom. When planning this, the original strategy was to use a home equity line of credit to pay for it. Instead, I used the credit card everywhere I could. I got 1% back plus no interest charges. When the 15 month interest-free period ends, I'll pay off the card with my HELOC, which has a much lower (and tax-deductible) interest rate.

As you can see, I don't quite go all out trying to maximize my credit card rewards, but I do make an decent effort. It does require attention to detail, but that's the type of person I am anyway, so I'm comfortable with it.