Credit Cards

Debt is not something we desire to be in. Carelessness while using credit cards can lead you to the path of being buried in debt. However, like many other things, with discipline, this tool can be extremely beneficial for users. Most people have a reason for choosing a particular credit card over another.

0% Introductory APR: Many financial institutions provide credit cards that have zero annual interest rate for the first few months (or first year). This is attractive to many people who carry a balance and wish to dodge the interest amount. Though short lived, this feature can be attractive if supplemented with good investing methods. For example, suppose you spend $20,000 in a year. If you maximize these expenses on one card with 0% APR, then you could invest the $20,000 in stocks or index funds. Assuming you invested carefully, you can earn interest on the amount while not paying the interest. Once the introductory APR offer expires, you can pull out your invested income and pay back the balance you owe the financial institution. This way, you can make money by borrowing. Unfortunately, most individuals use 0% APR to delay the repayment of their huge debt. Spending discipline is a must for financial freedom. You must only spend what you can afford.

Cash Back: There are many providers for credit cards that offer cash back rewards. Some cards offer 3% cash back on restaurants or gas, 2% cash back on groceries, 1% cash back on other purchases. Others offer varying percentages of rewards on different merchant types. These can come handy as your expenses add up and you could get statement credit at the end of the month. Suppose you spend $20,000 in a year, with 1% cash back, you stand a chance of earning at least $200. Not bad for just making purchases with your credit card right? Again, I insist that credit card is a privilege that needs to be exercised with caution. By spending more than what you can afford, you may end up paying more interest in a month than the rewards you may potentially earn in over a year.

Travel Rewards: For those of us who enjoy travelling, there are several providers that offer travel rewards. These cards typically earn you bonus points when expenses are made for travel purposes like restaurants, hotels, airlines, touristy expenses etc. A popular example is of a travel card that offers a 2% points earning on travel related purchases and 1% points earning on any other expense. While some financial institutes allow points to be redeemed in the form of cash back (making it similar to a cash back type), most people use these cards to transfer points to a rental car, airline or hotel partner to accumulate enough for a free getaway. There are many that come with additional travel perks like airport lounge access, free airline trip insurance, lost baggage insurance, rental car collision insurance etc. Since every saving adds up, these features can end up saving you hundreds of dollars every year.

High Introductory Bonus Points: Banks love to have new customers. One of the main ways a financial institution makes money is through the interest paid by the users. I could not emphasize more loudly about the need for caution while using the powerful plastic (or metal in some cases) in our wallet. Many financial institutions offer credit cards with high introductory bonus. For example, a large financial institution offers a credit card which gives its users almost $500 in bonus rewards if they spend $3000 in the first 3 months. Another word of caution here, if you overspend to achieve this reward, you are not being very smart. $500 reward is still way smaller than the $3000 they want you to spend. An easy way to meet the spending limits of various cards (if it is way higher than your typical expenditure) would be to offer to pay for a trusted friend’s expenses for a month or two. You could also get an authorized user card for the friend so that he/she can use it to help you meet the spending requirement. In this scenario, please be aware that it will be you who will be responsible for financing the expenses made by your friend and hence, make sure it is a friend you absolutely trust. Many friendships have been ruined when money came in the middle. Please exercise caution.

Other Advantages: We all have our preference when it comes to shopping, travelling or even in some cases, refueling our vehicles. When brand preference comes into the picture, we may as well get the most out of it through store credit cards. Popular gas stations offer credit cards with benefits of lower gas prices for users. Retailers have credit cards offering special discounts to card holders. Major airline companies offer credit cards that tend to make the travel experience more comfortable for card holders in the form of priority boarding, lounge access, free in-flight Wi-Fi etc. Almost all popular retailers offer their own credit card through some financial institution. Depending on your lifestyle and your preference, with an analysis of how much money you tend to spend in a particular store, a store card could be beneficial for you. 

Caution: Credit cards can be extremely beneficial if used with caution. They are a great way to reap small rewards out of our expenses. It is important not to fall for the rewards and try to overspend. Remember that the rewards are often very small compared to the expenses. When Chase launched a new card last year with $1,500 bonus for a new applicant, it costed them $200-300 million within the first quarter of the card launch. The CEO of JP Morgan Chase, Jamie Dimon told CNBC in an interview “I wish it costed us more”.  Imagine the amount of money they expect to make out of defaulters to make a statement like that. Think about how the banks and other financial institutions make so much money. They are not running charity organizations to offer rewards to every spender. They make more money out of one person trapped in debt than they would lose in paying out rewards for many customers. What you have in your wallet is an extremely useful but dangerous weapon.

Disclaimer: This article is not provided or commissioned by any credit card issuers. Opinions expressed here are author’s alone, not those of the issuers, and have not been reviewed, approved or otherwise endorsed by the issuers.