Credit cards are not naturally evil. And not all credit cards and debt are equal. The right credit cards are an important tool in your frugal living toolbox. Let’s step through how to use the right cards to save money.
Get the best card for your credit profile
Do you know your credit score? Do you know what’s on your credit report? You should. Having a clean credit report with a high score saves you money on credit and gets you access to credit cards with lower rates and better perks.
However, just because your credit score is not the best right now, you can still take advantage of decent credit card rewards while you clean up your credit. In fact, using your credit responsibility will help raise your score and you can eventually trade in your mid-level cards for cards with better rewards and perks.
So while you work on your credit, get the best card you can qualify for. Use this site to find a card that matches your credit profile and compare common features, like:
- Annual fee – the goal is zero fees, annual fees eat into the annual savings you get from using cash back rewards
- Cash rewards – look for cards that give cash back for your purchase, ideally on every purchase type
- Interest rate – the lower the better, although the goal is to never carry a balance, sometimes life happens, so be prepared
- Perks – these are extras in addition to cash back rewards, “nice to have” things like discounts at certain retailers, rental car and/or trip insurance
Use your credit card – for everything
You probably wondering how using your credit card for everything can save you money. It absolutely can. But it takes three key things: a budget, good credit card cash back rewards and discipline.
The goal of this strategy is to maximize your cash back reward earnings, essentially creating a built-in discount on everything you buy. During the course of a year, this can add up to quite a bit of savings.
Create a budget
Take an honest and accurate look at your monthly income. Cut away any waste where you can. Then take your monthly spending, including your essentials like groceries, gas, household supplies, etc. and pay with your credit card.
Strictly stick to your budget, because you want to pay your credit card off in full to avoid interest fees.
Use your card with discipline
It will be tempting to go wild with your card and overspend. Resist those urges. The whole point of this strategy is earning cash rewards, essentially getting a 5% discount every time you buy gas or groceries. Don’t mess up your free money by overshooting your budget and incurring interest fees because you can’t pay off the card when it’s due.
Reinvest your cash back rewards
So you have been working the strategy and built up a sizeable bit of cash back rewards. Most cards provide multiple options to use your rewards: send a check or direct deposit, apply to your card balance or some offer buying perks and such. Always choose direct deposit if it’s available. If not, choose to apply to your card balance. Never choose to buy perks or other rewards. That’s essentially spending your free money and eliminating the benefits of the strategy.
If you reinvest your cash back rewards, depending on your spending, you can see a double digit percent discount on your overall spending at the end of the year.
Ditch your debit card
Don’t use your debit card. Your debit card doesn’t give you any perks or cash back for use. Plus, your debit card doesn’t give you any real protection against theft and fraud. If you use your debit card at the grocery store or gas station and you run into a card skimmer, any money the scammers steal is tied up while you fight with your bank. This is your real money, tied to your actual bank account where your paychecks are deposited!
Your credit cards meanwhile have built-in fraud protection, a quick phone call, or even better, a quick couple taps on the phone app and your credit card is frozen and a new one is on the way. Plus, your real money and bank account are safe and untouched.
Double dip with an interest earning checking account
Now that you’re doing the majority of your spending on credit cards for cash back rewards, why not earn money on the cash sitting in your bank account too? Open an interest earning checking or savings account, with the correct timing, you can currently earn up to 3.4% on your money.
I like this Capital One 360 Performance Savings Account because it pays 3.4% interest, charges zero fees, has no account minimum to earn interest and has an easy-to-use app. Free money is sooo frugal.
Using credit cards in this way is a money making venture if done right. Be sure to never carry a balance. And always keep a close eye on your spending, don’t overspend and blow your budget – paying interest kills any benefit to this strategy.
I earn at least $60 a month just in cash back rewards. Free money every month for doing things I would do normally is a definitely a frugal hack.