Make Sure Your Credit Card Has Smart Features

The following is a guest post from Marotta Wealth Management.

Credit cards can be a blessing or a curse. Used correctly, they are both convenient and safe and can help you stick to your budget. But the dark side of heedless use can lead to financial ruin. Rather than rejecting credit cards altogether, however, choose the right card for the right reasons.

You are trying to be faithful to your budget and live well within your means. You want to become a supersaver, someone who amasses real wealth by living simply and investing the remainder. Now you have to set rules for how you will handle credit. If you don't, credit cards could undo all your hard work and planning.

Credit card companies know that people have an irrational loyalty to their first card. That's why they market college students so heavily. You may feel attached to your current credit card, but believe me, the credit card company feels no such allegiance to you.

Because both spouses must live with the consequences, each should have the right to veto any use of credit. Using credit successfully should begin with your choice of card.

Your sole criterion for picking a credit card is to maximize the financial benefit to your family, assuming you use the credit card correctly. You will be paying off the entire balance every month, so certain features, such as the interest rate, are not a concern. Nor do we care about how the company can change the interest rate if you fail to pay.

But to be in this enviable situation, you need significant taxable savings and investments in order to weather a financial emergency. Lacking such discipline, you may want a different type of card.

Credit cards companies create a host of gimmicks to entice you. Usually these come-ons are themed around a hobby or an interest. I'm certain you are proud of your alma mater and rooting for your favorite sports team. The credit card companies are counting on it. You can even have a photo of your children or grandchildren on the front of the card and change it every six months. Don't succumb.

Selecting the right card is worth about 2% of your credit card purchases. So if you spend $25,000 a year using the card, it means an extra $500 in your wallet. You can buy a lot of sports paraphernalia and photographs of your family for $500. Besides, the credit card companies don't really care about your sports team. They sell a matching card for your arch rivals too!

So forget about how the card looks and focus on the rewards program. Airline miles are the oldest and most common. Unfortunately, they are some of the worst reward programs. Over 75% of airline miles expire unused.

Card companies have also learned to provide themes for the rewards. Although it makes great marketing sense for companies to appeal to an affinity group using an exclusive offer, don't fall for such an appeal. Which would you rather have, reward points that can be spent anywhere or rewards that can only apply to one specific interest?

They may have some appealing offer, but you will be able to get it on eBay for a fraction of what you will miss by not using another card. Cash awards can be used to buy anything.

Get the cash. You could be earning game time with the World of Warcraft Visa. Or a donation could be allocated to the Make-A-Wish-Foundation for each of your purchases. But these may not be the greatest decisions after a year. With cash, you are in control. Get the money, and then decide if you want to buy the game time or make a contribution and take the tax deduction.

Most cards have a rewards program worth between one and three pennies per dollar spent. Oddly enough, themed rewards tend to be toward the low end and cash rewards are apt to be higher. Even the popular cards that fund 529 plans don't pay as much as a cash rebate. So get the cash rebate and then fund a 529 plan yourself, which can also net you a state tax deduction.

I've been using the Platinum Discover card, one of the first cards that offered a cash-back bonus. It used to be 2%. Now it is 1% with a 5% cash-back bonus on certain items you sign up for every three months. Even then it has maximum amounts.

During the process of researching this article, I've learned about several flat 2% unlimited cash-back options, one with Schwab Bank. Because we use Schwab as a custodian for our assets, it makes everything easy. The cash rebate is deposited directly into our investment account. That makes it 2% additional savings instead of 2% additional spending.

Usually I don't mention specific products, but my experience should help illustrate two principles. First, the best choice changes regularly. And second, you should be looking for at least 2% cash back on your purchases. Some savvy consumers literally use a deck of credit cards to take advantage of special offers. One card gets 5% back at Wal-Mart. Another gets 5% back on gasoline purchases. I'm interested in simplicity. Let me know if you find a deal better than an unlimited 2% back on all purchases.

Needless to say, your credit cards should have no annual fee. And the company should allow you at least 20 days to pay your bill before interest accrues. You should never be paying interest.

Another very helpful feature is the ability to download your purchase information electronically. Importing this data into your budget can save you time. Electronic interfaces exist for QuickBooks, mint.com or a simple spreadsheet format. Most people find keeping track of a budget too much hassle, but the right credit card can simplify the process.

Probably one of the greatest time-saving devices is being able to put all your purchases on a credit card, receive 2% cash back and then roll all those purchases into your budget once a month. With QuickBooks, so long as you have purchased from the vendor before, the software remembers how you coded past purchases and automatically assigns a category.

Some credit cards offer to extend the warranty for items you have bought using it. This may be called a warranty manager feature. Usually it doubles the free repair period for up to one year for eligible purchases. I never recommend an extended warranty, but getting a free year for no extra charge can be very worthwhile.

Finally, many credit cards are offering a feature called ShopSafe that allows you to shop online and generate a onetime-use credit card number for Internet purchases. If you worry about your credit card number being compromised on the Internet, this service will give you some additional peace of mind.

Starting with the right credit card for the right reasons will make using it properly that much easier.

Comments

[MC]

I have also noticed that all those products you can "buy" with your reward points are always worth less than the cash you can get for your reward points.

What's up with that? Do any people actually prefer the overpriced products? Even the coupons and gift cards aren't worth more than the cash back. So weird.

[Steven Francis]

I am always scared to use these cards as they sometimes create a messy situation. I always get my credit card bill more than what i expect. The credit card provider puts some extra charges. n order to hide that they are providing some offers like cash back offers.

[Jon]

I have never heard of a millionaire getting that way by making 2% off his spending. They usually get that way by making 10% on their saving.

The only case I can see where having a rewards card would be good is when you must use a card to be reimbursed at work for multiple trips per year. As you get up in the thousands of dollars, as long as you pay off the balance each month, you will make a little cash.

[Strick]

I never heard of a millionaire not trying to get a discount on their purchases.

Making that 10% on $500/year in cash rebates does actually add up to $1M over 55 years.

Obviously this is not a good strategy for Steven above or maybe, taken to the extreme, even anyone with a credit card limit larger than their liquid assets. But I pay off my balance automatically each month and can do a lot more damage to my overall finances with my debit card than I can with my credit card, so I don't really understand the fear of them among the financially literate.

[Crystal]

I love using our two Discover cards for everything we can for all the reasons stated in the post. We use the Discover More card for everything but car expenses (like gas) and get 1-5% cash back. We use the Discover Open Road card for gas and car maintenance and get 5% cash back. We also have a Mastercard that earns 1% cash back after spending $25,000, but we only use it for places that don't take Discover...it comes in handy for my husband's graduate school expenses.

Plus, if we know we are going to a specific place or need a quick gift, we can maximize our cash back by purchasing gift cards from Discover...we can buy a $25 gift card for several places we use for $20. It isn't a huge deal, but we like it. This only works well if you were going to spend money there anyway, otherwise it would be better to just apply the cash back to your bill or have it deposited into your checking account.

We have a very stable, set budget and have never carried a balance. If you have a hard time controlling credit expenditures or think you will carry a balance, do not get a credit card...5% cash back will not cover the finance charges.

[Eric]

@Crystal

FYI...there are a host of cards out there that pay 1% straight without having to spend $25,000 (ridiculous amount for a meager cashback rate). If you search even a bit more, there are cards that pay 2% back regardless. The Schwab card is one.

[Crystal]

@Eric
Yes, we know. That Mastercard has the highest credit available among our cards since I got it first when I was 18. Other than these recent graduate school expenses, we only use it for our electricity bill and the occasional restaurant that doesn't accept Discover (less than $200 total a month). It is used more as a benefit to our credit rating than anything else. I was just fully disclosing all the credit cards we use and their specific benefits...

I looked into the Schwab card after reading this post, but what I found at http://www.filife.com/reviews/charles-schwab-bank-invest-first-visa-signature-credit-card says that, "Card holders earn 1 point per dollar spent which is converted into cash at 2% and deposited every month into an associated Schwab One Brokerage account. Card holders do not need to have a brokerage account to accrue points, but must have an account in order to earn the rewards."

We do not plan on ever having a Schwab One Brokerage account, so the points would be useless to us.

I also looked into the American Express TrueEarnings card that gives 3% cash back for gas and restaurants, 2% for travel, and 1% everywhere else. But, it seems to require a Costco membership since the cash back comes as a Costco cash coupon. I'm a Sam's Club fan myself. Plus my parents had a several bad American Express experiences when I was younger and that has stuck with me.

[Drhilarius]

@Crystal: You can open a Schwab Brokerage fairly easily and needn't maintain a minimum or ever use the account and you don't have to pay maintenance fees. Trasferring money out of the account is fairly painless.

I'll admit bias, as I have a Schwab CC, Checking, and Brokerage account, and this trifecta has worked quite well for me.

Added bonus to Schwab card, especially if you travel, no foreign transaction fees.

[Texas Wahoo]

Some credit card companies actually give money back to your alumni association if you get that card (in addition to the cash back).

[Crystal]

@Eric and Drhilarius
I'll take a closer look from home at the Schwab One Brokerage account...maybe it can be our main backup and we'll keep the Mastercard open with a few small charges a month.

Does anyone know how bad your credit would be hurt if you close a credit card that has 1/3 of your available credit?