IF YOU USE A CREDIT card, you should use one that gives you rewards, whether it’s cash back, rewards points, frequent-flier miles or some other bonus. Typically, these rewards are worth around 1% of the amount you spend, though some cards give as much as 2% and others have rotating categories where you can earn extra rewards, such as 5% cash back on restaurants or grocery store purchases. Some cards also offer a onetime bonus if you spend a specified sum in the initial months that you carry the card.
Many rewards credit cards don’t charge an annual fee. That isn’t true, however, of cards that pay airline miles or other travel rewards points, so you need to weigh the annual fee against the value of the points you are likely to earn during the year. One strategy: Cancel the card after 12 months, so you collect the signup bonus—often worth tens of thousands of points—but don’t continue to pay the annual fee year after year.
While it is appealing to earn rewards, the value of those rewards pales next to the interest you’ll pay if you carry a balance. Suppose you have a card that charges 18% in annual interest and pays you back 1% in cash. If you spend $1,000 and carry that balance, the 1% cash back on your $1,000 of spending will be less than one month’s interest expense. And if you carry that balance month after month, the math only gets worse.
Our Humble Opinion: Credit cards are a financial nightmare for many Americans because they make it so easy to overspend and end up in a financial hole. It doesn’t have to be that way: If you funnel as much spending as possible through a rewards credit card and you’re careful to pay off the balance in full every month, you will avoid the downside of credit cards, while collecting the equivalent of 1% back on every dollar you spend and perhaps more.
Next: Credit Card Perks
Previous: Credit Cards