Credit Cards – Friend or Foe?

Do credit cards offer any utility or are they only to be avoided at all costs? In a previous post, Slay the Debt Dragon, I discussed how credit card debt became a major financial burden for my wife and me. We had to buckle down and implement a plan to get rid of our high-interest debt before we could make any substantial progress saving and investing for the future.

After paying off all of our credit card debt, it was hard for us to consider the advantages that using credit cards could offer. We were fearful of overextending ourselves again and getting back in over our heads. Frankly we were enjoying seeing the progress toward our savings goals that eliminating that debt allowed. However, as time passed, we began to see how credit cards might be used to our advantage provided that we were disciplined in their usage.

One major advantage that using credit cards has over debit cards for purchases is the extra layer of fraud protection they provide. If an unauthorized charge occurs, your bank account is not directly at risk and challenging a credit card charge is, in my experience, relatively easy and unlikely to cause any financial loss – fraudulent charges are not always as easy to resolve when a debit to your bank account occurs.

Another major advantage of credit cards over cash or debit is for purchases that may require a security deposit, such as a hotel room or a car rental. Typically, if using a debit card, a large hold may be placed on the funds in your bank account – not so with a credit card. Even gas stations typically pre-authorize purchase transactions by placing a temporarily hold on funds in your account when using a debit card.

Reward programs are now frequently associated with credit card accounts. This is an additional (and significant) reason I favor credit cards over debit cards, checks or cash. I use credit cards to my advantage, maintaining a disciplined approach to their usage, and actively monitor all activity with text and email notifications. No longer fearing the downsides to using credit cards, I put every possible purchase on reward cards.

What’s in My Wallet?

I have a few credit cards, each with their own reward advantages. In general, I opt for cards with no annual fee, understand the reward programs completely and target card use to maximize rewards. I account for every amount charged as it is made and pay off the balance in full each month with an automated payment from a checking account. That last point is crucial! When carrying a balance on a credit card, any potential rewards (mileage points, cash back, etc.) are likely more than offset by interest charges. In addition, when carrying balances over from one month to the next, any new charges accrue interest immediately and do not benefit from any grace period.

I use a few cards that currently offer me the best rewards. My American Express Blue Cash Preferred card is the only exception to my no annual fee rule. For a $95 annual fee, I receive 6% cash back on groceries (for up to $6,000 in purchases per year), 3% on gas and select department stores, and 1% on everything else. I use my AmEx primarily for groceries to receive the 6% cash back reward, but will also use it for gas if another card isn’t currently offering fuel as a bonus category (see below). The company also offers a similar card with no annual fee, but the grocery reward is reduced to 3% and gas and department stores to 2%. After doing the math (which I highly encourage everyone to do), it is more advantageous for our family to pay the annual fee and receive the higher reward credit given our annual grocery spending.

I have two additional cards with no annual fees, Chase Freedom and Discover It. These two are used for their rotating 5% cash back reward categories (for up to $1,500 in purchases per quarter). Every calendar quarter the categories change. These rotating categories often include: grocery stores, restaurants, gas stations, transportation, home improvement stores, department stores, wholesale clubs, Amazon, Target, Walmart, among others. I carefully manage the usage of these cards to take advantage of the bonus categories. I do not buy more than I would otherwise. (For example, we will not go out to dinner more often simply because it is a current rewards bonus category.) I only use these reward cards for purchases that were intentional regardless of the reward incentive.

Another credit card I carry is the Citi DoubleCash rewards card (also with no annual fee). This one pays a flat 2% cash back reward on every purchase. When a bonus category is not available for an intended purchase on another rewards card, I will use this card as it offers the best non-bonus everyday cash reward.

The only other credit card I have is a Chase Amazon Prime rewards card (again, no annual fee), that offers 5% cash back on purchases. This card is solely used for purchases on Amazon.

I cannot stress enough that the only way this system works to my advantage is because the entire balance on every card is paid in full every statement period. To ensure that this happens, an automatic payment has been established for each account to pay the full balance due every month, which ensures that no interest charges or late payments occur.

How I Keep Organized

Sounds like madness? Ridiculously confusing? Hard to implement?

Here are a few ways I am able to keep on top of it. I maintain a list of all of the current reward categories in a note on my phone and refer to it if necessary prior to any purchase. When I make a purchase, I immediately enter the amount on a spreadsheet that tracks all card activity by statement cycle. That way I know exactly how much will be deducted from my checking account via auto-pay. My wife and I monitor the spreadsheet throughout the month and make sure to keep our spending well within our predetermined budget so we never run the risk of being overdrawn or having to pay less than the full amount due.

I use the card company apps to send text notifications for every transaction. For me, this also adds a mental reminder that I’ve made a purchase, which helps maintain “conscious spending.” I know the app is going to ding as soon as I make any purchase which helps prevent impulse purchases (as silly as that may sound, it works for me!). This notification, like a receipt, is a reminder to record all transactions as well as alerting me to any unauthorized activity. In addition, I also receive notification alerts when my statements are available and when payments are credited to the accounts.

By ensuring that all credit card balances are paid in full every month, I get to take advantage of the grace period offered for accounts that carry zero balances. This is referred to as free float. The credit card companies are in essence giving me an interest-free loan for the 30-day grace period every month. (I continue to emphasize the monthly pay-in-full mantra, as it is crucial for a plan like this to make economic sense.)

To maximize the reward benefits and also to make things somewhat less complicated, I automate all possible purchases on the appropriate rewards card, such as utilities, insurance, and any other recurring charges. Again, we use our credit cards for nearly every purchase possible. This allows for maximum cash back rewards potential and helps to keep track of all expenditures. In addition, only a few items (each auto-pay) are debited from my checking account each month.

What’s the Reward?

So what does our family do with the rewards? There are many people who may prefer travel rewards, but we happen to have a preference for cold hard cash. As rewards accrue, we could simply choose to use them for statement credit. However, we often allow amounts to accumulate and use them for a given purpose, like a vacation, a large (planned) purchase, or something unexpected (kind of like a mini emergency fund).

I have found that these cash rewards can be fairly significant on an annual basis as a result of maximizing the bonus categories. All of this at a cost of next to zero, our only cost is the American Express Cash Preferred annual fee of $95 and never an interest charge. We also receive free 30-day float due to the grace periods. In the meantime, a dollar amount equal to our average monthly expenditures can sit in our online savings account earning interest.

If you are very disciplined, reward credit cards can be your friend. However, if you think you run the risk of making unplanned or unnecessary purchases, or carry any balances from month to month, credit cards will be your foe. The choice is yours.