My Wife and I love using credit to our advantage. Before I explain further how we use credit to our advantage, let me preface this post by saying the use of credit is not obligatory. Nowadays you can use a Debit card for just about anything, including car rentals. However, if used wisely, credit in many cases can be more advantageous than simply using your debit card or cash. We’ve enjoyed using credit to our advantage, but in the past we did not use credit so wisely, which made our purchases (and use of credit) more expensive than they had to be (through interest). In other words, we used credit to our detriment rather than to our advantage. Thankfully we’re wiser now and are reaping the benefits, some of which are shared below. Before we dive in, let me state the Golden Rule of using credit cards:
Golden Rule of Credit Card Use: You must pay your credit card statement balance in full every month in order to avoid interest charges.
If you are not 100% committed to following this rule, stick with debit cards/cash for the benefit of your overall financial journey.
Using Credit to Your Advantage
Credit cards can be a great way to better manage your cash flow. By “cash flow” I mean the amount and timing of many coming into and going out of your bank account, and whether there is “enough” money in your bank account to cover all of your expenses. For me, instead of using my debit card or cash to pay for reimbursable company expenses, I simply use a credit card. I’m usually reimbursed prior to the statement balance on my card needing to be paid, meaning there is no extra money coming out of my bank account to cover these expenses. Using credit has also been helpful to us for big purchases which we may not be able to (or willing to) cover purely through our checking account (or for which we do not want to dip into savings). In those cases, we simply use our credit cards and pay the purchase off next paycheck (and before the statement balance is due). Reminder that we only keep enough in our checking accounts to cover monthly expenses.
Reward points are another great way to take advantage of credit. I’ve seen credit card rewards get much sweeter over the last ten years, with some banks giving up to 5% cash back on certain purchases or huge sign-up bonuses for their cards., for example. Reward points can be a GREAT way to reduce your overall expenses, BUT reward points only become advantageous if you pay the full balance of your credit card every month to avoid interest charges. Personally, we have racked up over $2,000 worth in reward points this year that can be used towards travel, all without a single dollar paid in interest. Since my Wife and I travel a lot and live overseas, reward points are a big advantage for us.
Besides reward points, many banks are stepping up their games with great perks. For example, the primary credit card we use comes with no foreign transaction fees. We also get special car rental privileges with certain rental car companies and free access to over 900 Airport lounges (great for long layovers!). Last, we get a statement credit of $300 for any travel related purchases that we make throughout the year – this is in addition to reward points granted for those purchases. These are all great perks for us again considering that we live overseas.
Enhanced Purchase Protection
Fraud protection is a given on both Debit and Credit cards. However, “Purchase Protection” is a perk that the best credit cards excel at, and this perk can really offer peace of mind when making large purchases. For our primary card, we are covered against damage for up to 120 days after the purchase. Also, we receive an automatic extended warranty of one year on top of whatever warranty is offered by the manufacturer.
These are just a few of the advantages we’ve gained through the use of credit. Indeed, wise use of credit can be a key step towards creating your own set of great financial habits.