We recently suggested ways to Stop Wasting Your Money with These 8 Simple Tips, a topic related to Rule 7 of the Personal Kaizen 10 Rules for Life. Our last post was How to Improve Your Credit Score and Save Thousands and included advice for building your credit history using credit cards. This post will teach you how to take advantage of the secret benefits of credit cards.
Credit Cards are NOT Evil!
Dave Ramsey is one of several well-known personal finance personalities who discourage the use of credit cards. Ramsey writes,
“A life without credit cards is a life of freedom. Why? Because you won’t get stuck in the revolving cycle of credit card bill after credit card bill. You won’t have to worry if you’ve missed your payment. And you won’t have to spend your paychecks on old purchases in the form of monthly credit card payments.”
His advice is great advice for anybody who is young and undisciplined. However, it is also very damaging in several ways:
- Credit cards are the first and easiest way many people build their credit history
- Credit cards can provide convenience and security
- Credit cards have many secret benefits
It can be wonderful to be able to buy an item you need without worrying about having the cash in your wallet or exact change. Debit cards can also provide this convenience, but then you miss out on the other benefits we share below.
How Issuing Banks Benefit from Credit Cards
Each bank offering a card charges merchant fees for the convenience of their customer using a card. In other words, most stores and sellers will pay credit card issuers a fee (usually around 1.5% to 3.5% of the purchase price) whenever they are used. Banks also earn income from late fees and interest users pay for the credit extended.
For consumers, we typically pay the same price whether we use cash or credit! That means the merchant is paying credit card fees while we are not! So long as we avoid fees and interest payments, we can also benefit from using credit cards.
Cashback from Credit Cards
Issuing companies compete for your business by offering benefits. The first benefit to using credit cards is a simple one – the banks give us cashback from our purchases. Here are several ways our family benefits from cashback cards.
For the past several years our family has used the American Express Blue Cash Preferred Card for many of our grocery purchases. The card requires good credit and charges a $95 annual fee to use. This fee is worth it when you consider that the card pays us 6% cash back on up to $6,000 in annual grocery purchases! Our card also pays 3% cash back at gas stations, although this may not be available for new cards.
We also currently have an Amazon Prime Credit Card from Chase that we use exclusively for Amazon purchases. The card provides 5% cashback on all Amazon purchases. This is a 5% discount off of everything we buy on the site (and we buy quite a lot)! The card also has no annual fee.
For regular purchases, our current go-to card is the Citibank Double Cash card. The card provides 1% cashback when you buy an item and another 1% when you pay your balance. Since we pay our balance in full every month (and if you don’t do this, we recommend you stop using credit cards) that is a full 2% discount on every purchase. The card also has no annual fee.
Cashback can be redeemed by logging into your online account (or calling) and requesting a statement credit, a personal check, or a gift card from a partner merchant.
Credit Card Points (and Sign-up Bonuses)
Some banks partner with companies to offer benefits towards their rewards programs. These reward points or frequent flier miles are added to your merchant reward account every month based on your purchases. We will share some tips for benefitting from these reward points in our post next week. This will include step-by-step instructions on how to travel for free with these simple tips.
Other Important Credit Card Benefits
There are many other benefits to using credit cards that need to also be considered. These secret benefits include:
- The “float” credit cards provide. As long as you don’t carry a balance (have we mentioned how important this is!) credit cards don’t charge any interest until the date your payment is due. This means when you pay the full card balance every month you can purchase an item in June, pay the balance when it is due 25-55 days later, and never pay a cent in interest.
- Great international exchange rates! We pay for restaurants, hotels, and activities with our credit cards when we travel internationally and we know that we will get the bank-negotiated exchange rate. This is nearly always better than what a local merchant offers. Be aware that some credit cards charge a fee (between 2-5%) for using your card on a foreign transaction. Call or do a search on the internet to make sure your card does not charge this fee!
- Extended warranties on the items you purchase. All American Express credit cards and certain cards from other banks will automatically extend manufacturer’s warranties if you use their card to make the purchase. We previously shared ways to stop wasting money on insurance and warranties – use a credit card for this benefit instead!
- Free insurance on certain purchases. A few years ago, our family rented a car in Europe for a family vacation. When we returned the car, they said we had to pay for a minor dent from an accident. I had refused to pay for the rental car extended coverage because I knew I had rental car insurance provided by my credit card company! We paid $500 to the car company, filed a claim with the credit card company, and later received full payment for the accident. Read the fine print and look for these additional coverages!
- Support with any disputed charges. If you ever need to dispute a charge from a vendor your credit card company can be an ally. Call your credit card up and explain why you refuse to pay. Make sure you have good records on why you are refusing payment – I have tried this once in my life and didn’t have enough proof.
- A purchase history. Another nice benefit credit cards provide is proof of purchase. This can be helpful for budgeting and can also be used as a receipt if you ever need to prove that your purchase is within the warranty period.
If you are a responsible, credit-worthy person we hope to have convinced you to use a credit card or two. Our family has probably received between $500 and $1,000 in cashback over each of the past several years, and also learned credit card hacks that let you travel for free! Check back next week for an example of a trip we just planned for later this year and step-by-step instructions on how you can travel for free too.
Did any of these benefits surprise you? Did we miss any additional benefits credit cards provide? Please leave your questions and input in the comments below.