Imagine ordering a coffee and slipping into a daydream. Are
you also hearing Jennifer Garner, ask "what's in your
wallet?" Well, what's in your wallet is very important. And as
for all that credit card rewards talk, she might be on to
something.
Most people should be able to save at least a few hundred
dollars every year just by using the right credit cards.
If you travel as much as Peyton Manning or are a diehard Swifty
trying to save on those expensive concert tickets, as
these commercials will tell you, there's a card for everyone. And
those cards will save you money. Well, that is if you have the
funds to make the rewards worthwhile. They could
be really useful, or they could be dangerous. I think the
biggest tip is to know yourself.
Love them or hate them, those plastic or metal cards that can
instantly purchase anything from a coffee to a car are no
stranger to consumers, more than 80% of Americans own at least
one credit card. Every time you pay for something with a credit
card, you're borrowing money from the card issuer to cover
your purchase. While it might feel like it, it's certainly not
free, you then have to pay that money back either in full at the
end of the month or over time - with interest.
The average credit card charges about 20% interest these days.
So it is a very profitable business.
So first things first. If you're not in a place where you can pay
that money back by the time it's due, experts don't recommend you
have a credit card at all.
20% interest on a balance that you've accumulated and then you
pay interest on top of that. I mean, that's a really big hole
that you're continuing to dig and it's going to be really hard
to get out of if you don't pay your credit card balance.
Credit cards require approval. Once you're approved, the bank
authorizes a credit limit or the maximum amount of money you can
borrow. That depends on factors such as your income, your other
debts, and how much available credit you have on other cards.
But here's the caveat: whether or not you're approved depends
on your credit score. Meanwhile, your credit score is determined
by your credit report the information related to your
credit activity activity you might not have if you don't have
a credit card.
It's a catch 22. How do you build your credit history? Well,
the simplest thing is really to get a credit card, use your
credit card and pay it on time. Credit
scores generally range from 300 to 850. The higher the credit
score, the more responsible you're deemed. Credit scores not
only affect whether or not you get approved for credit cards,
but also your credit limit. And your interest rate on loans,
mortgages and the terms lenders may assign you. insurance
providers landlords and employers might also want to do
a check to determine your trustworthiness.
If your goals are to buy a house, get a car, get a loan.
The first thing that you need to do in order to build your credit
history is to get that credit card going.
Those Jennifer Garner commercials are for Capital One,
but there are numerous companies in the US that offer a wide
range of credit cards. There's the issuers American Express,
Discover Bank of America, Citi, Wells Fargo, and then there are
the networks. They facilitate transactions between the
merchants and the card issuers. The four major card networks are
Visa, MasterCard, American Express and Discover. Two of the
world's largest card networks, American Express and Discover,
are also card issuers. There are standard credit cards, rewards
cards, balance, transfer charge, student business secured limited
purpose prepaid cards, and the list goes on - different options
that may or may not be right for you depending on your personal
circumstances. Standard credit cards are the most traditional
type. They have an Annual Percentage Rate or APR, sign-up
bonuses, annual fees, late payment fees, balance transfer
fees, foreign transaction fees and the most exciting - rewards.
There's actually a whole industry dedicated to maximizing
credit card points and miles. Some people love it and they
love going down that rabbit hole and treating it like a game.
Bankrate.com Senior Analyst Ted Rossman earned more than $1,700
in rewards in 2022. But getting the most out of your credit
cards depends on your spending habits, which perks would save
you the most money. So how do you choose?
If your family spends a lot on groceries, get a card that gives
5% or 6% cash back on groceries, like that's a really nice
inflation buster right there. Maybe consider a second card
that's just a solid flat rate, something like 2% cash back on
everything. Most people should be able to get at least $200,
$300, $400 a year just by using the right cards.
Rossman says the rewards that get the most attention are often
travel related flights, hotels, rental cars, access to airport
lounges, free or discounted TSA PreCheck, priority passes,
Global Entry or clear to get you through those long airport
lines.
I think a really good strategy for a lot of people is one of
those transferable points cards, something like Chase Sapphire
Reserve or Amex platinum. Being able to transfer to different
airlines and hotels opens up a lot of options. The sort of next
level tip is within that - if you find partners of partners
like United's part of the Star Alliance and American as part of
one world.
Then there's rewards for dining, groceries, gas, and also
complimentary memberships and subscriptions. Big perks for
many are extended warranty and purchase protection.
A couple of years ago, I actually saved $300 on an Apple
watch repair, the credit card covered the replacement.
But according to Bankrate, Americans' favorite credit card
reward is cash back. Think especially
now with high inflation, I mean, who couldn't use more cash
right?
Whereas redeeming for merchandise will likely not get
you the most bang for your buck. Other rewards include sign-up
bonuses, fraud protection, and having the ability to invest
your money and take advantage of interest rates. Another thing to
consider is how much work you're willing to do. Are you that
person who's going to tape notes onto your cards to remind
yourself which should be used for different types of
purchases?
I know some people that have 30 or more credit cards, and they
have really good credit, and they get really good perks, and
they're constantly flying first class for free. Now that's not
for everybody. Of course, the average American has about four
credit cards. But even with four cards, sometimes there can be a
game element to this.
Having multiple cards and playing that rewards game can
get you some substantial sign-up bonuses, like the Capital One
Venture Rewards credit cards' 75,000 miles, or Ink Business
Unlimited's $900 in cash back.
If you are playing this rewards game, which a lot of people like
to do, because they like that upfront bonus, you're getting a
new credit card, and then you close it out, you're losing that
credit history. So my recommendation is not to do
that.
Only use a credit card if you can use it responsibly.
American credit card balances reached $986 billion in the last
three months of 2022. The big
fork in the road is whether or not you carry a balance. If you
pay your credit cards in full every month, then yeah, I think
you should use your credit card for everything because rewards
are great, they can really add up over time.
Even though it's simple math, a 2022 survey found that among
credit card holders who carry a balance, cash back was more than
four times as popular as a low interest rate. Meanwhile, a
large share of those who owe debt - 40% - don't even know the
interest rate for the primary card on which they owe money.
One of the biggest things that we see about the spending of
credit cards and those that are using it incorrectly are those
that are either from lower income households, those that
are uneducated in this because no one is talking to them about
money. A recent
Bankrate survey found that 30% of those without a high school
degree didn't redeem the rewards compared to 16% with a four-year
degree and the lower an American's income, the more
likely they were to let those rewards sit as well. More than
30% of those with annual household incomes below $50,000
left value on the table, compared to about 20% of those
with incomes between $50,000 and nearly $80,000. And just more
than 10% with incomes of $100,000 or more. SageMint
Wealth managing partner Anh Tran says culture plays a big part in
how people spend.
I grew up in an immigrant family, I wasn't taught about
personal finance, you just make as much money as you can and get
yourself out and build wealth for yourself.
Tran recommends having two credit cards and three if you're
a business owner: one for primary expenses, a second as a
backup, and a third to keep business expenses separate. She
says there should also be thought going into your credit
card limit and your spending ratio.
Let's say you have one credit card, and you've got a $10,000
limit on there, and you spent all the way up to $9,000. That
actually will lower your credit score because your
credit-to-debt ratio is not good because you've used up most of
your credit. So the rule of thumb is I would say try to
stick to around 30% and using what your credit availability
is. And so that's why having a second card will give you a
little bit of leeway and giving you more credit to spend.
For those with credit card debt while experts don't recommend
you open multiple credit cards and try to maximize your
rewards, that doesn't mean you shouldn't work on ways to build
your credit so that you can get to that place. If you
have credit card debt, no shame a lot of people do - about half
of card holders, but you need to put your interest rate first. So
maybe seek out a 0% balance transfer card or stick to the
lowest rate card you can find or just use cash or debit until
you're debt free.
There are a lot of cash back rewards cards that do not have
annual fees that will give you 1% back on all your purchases,
and that is probably the most simple.
Now let's say you get to a place where you've got some plastic in
hand, and you're feeling good about those rewards. The work
doesn't end there. She says you should continue to reevaluate
your debt and credit cards at least once a month
Tracking your finances, whether it's on an Excel spreadsheet or
using an app like mint.com, something that will track what
all of your assets, all of your debt and liabilities are so that
you know where everything is.
And if you're racking up those points, use them. Almost a
quarter of rewards credit card holders haven't redeemed any
rewards in the past year. And that's an improvement from the
31% of those who didn't in the preceding 12 months.
It doesn't get more valuable over time. In fact, a lot of
times these programs change their rules in ways that the
industry calls devaluations like basically it costs more points
or miles to get the free flight or the free hotel stay. So use
them sooner rather than later. And then cash back can lose
value to inflation.
Most people are scared of money and you shouldn't be. If you
know the facts and you understand how money works, it
can be really empowering.