How I started using credit cards instead of debit cards
Years ago I attended a conference in the Adam Clayton Powell building in Harlem which discussed entrepreneurship and building a business from scratch.
One of the sessions I attended discussed credit and how to use credit to your advantage. Now, I must admit that at the time I did not heed the advice that I had been given. I can’t remember the name of the teacher who told the session, but I do remember that he was a young, African-American male who owned a hedge fund in downtown Brooklyn.
One of the things he discussed was how he only used his credit cards to help build up his credit. He also mentioned that he always paid his credit cards off in full each month in order to maintain his high credit score and in order to keep his account open.
At the time I had just graduated from college and had built up quite a bit of debt from student loans. I also didn’t really heed his advice because at the time I had only one credit card with a $500 limit which was hardly enough to use for all my spending each month.
One thing he did not mention however was that the key to really taking advantage of credit cards was using cards which offer either cash back, points or if you’re lucky, both. I believe that had the instructor mentioned that little tidbit of advice I may have actually listened to him and put his advice into effect in my life. Now, this advice will only work if you pay off all of your credit cards each month and never keep a balance.
The reason you would want to pay off your cards each month is to avoid paying interest on your balance. Paying interest really defeats the purpose of using your credit cards to advantage because the interest will kill any money or points you do earn.
I now only use my credit cards to make all of my purchases each month. I hardly ever use cash either because there is no way for me to earn money back from my purchases if I am using cash to make purchases. The thing is you are going to purchase certain things anyway such as gas for your car or groceries or any other every day mundane practices.
What types of cards offer cash back?
Many credit card issuers offer cash back. The better your credit is then the more likely you are to qualify for a card that offers cash back or points. Your interest rate should also be lower when you have a good credit score, but the interest rate will be the least of your worries being that you will be paying off your cards before you are charged interest.
Be sure to apply for a card that does not charge a yearly fee as you will want to keep fees and charges to minimum.
The amount of cash back you can earn will vary based on your credit circumstances and the cards you have. Cards that offer cash back include the Discover IT card and the Apple Credit Card just to name a couple of them. The amount of cash back offered is somewhere between 1 and 5 percent for the cards I referenced above. For example, the discover it card offers 1% cash back on all purchases and each quarter for certain merchandisers they offer 5 percent cash back. So for instance they may have 5 percent cash back on restaurants for a quarter each year while all other purchases will give you 1 percent cash back.
The Apple Card offers similar tiers of cash back rewards. At some merchandisers they offer 3 percent cash back on all purchases, for all other merchants that you apple pay with your apple card you earn 2 percent cash back and for all other purchases you earn 1 percent cash back.
While 1 to 5 percent cash back may not seem like a lot of money on small purchases after a while the cash you get back starts to add up. This is especially the cash when you pay for your monthly bills, which are often quite larger with your credit card.
Personally I use my cash back rewards to not only pay for my every day spending, but on my bills such as my car insurance, cable and cell phone bills. This literally adds up to hundreds of dollars of cash back that I receive each year. I can then use the cash back to invest in things such as my IRA and reap year end tax deductions and the money that I save with my taxes can be used to invest in other things or just to save (although I would recommend other investment vehicles).
Although the amount of money you receive in cash back tend to be small amounts, small amounts compound and lead to larger earnings and savings.
What is a points credit card?
Some cards also offer points when you use the cards to purchase travel, dining, luggage, hotels or other items. Points accumulated can then be redeemed towards similar purchases in the future or for cash back or any host of other rewards. In essence the points you earn are as good as cash. This can end up saving you thousands of dollars in travel and other costs when you correctly.
Many credit cards, such as the Chase Sapphire card offer a bonus amount of points after you sign up and spend a certain amount of money with them. Also, your points are often added a multiples greater than 1:1 when you use them with certain vendors or for certain purchases. For example using your card toward an airline purchase could possible net you 5 points for every dollar spent. So if you spent $100 on tickets you would be rewarded with 500 points.
Typically credit card issuers will have a tiered point system, where points applied towards certain purchases are worth more than points redeemed for cash back. It is a good idea to compare point offers and redemption values prior to applying for a card so that you can be sure to get the one that fits well into your personal finance strategy.
You typically will need to have better credit to qualify for a points card versus a cash back only card. Some card issuers who offer points also have a yearly membership fee that you much pay as well if you want to keep using the card.
In conclusion, if you are interested in saving money, possibly earning rewards and gifts while keeping your credit in good standing then you will want to follow the steps I outlined above. Apply for a card that offers cash back or points, use the card as you would use cash and always pay off the full amount you owe each month.