How to Profit From Credit Cards

August 28th, 2009 | cashrunner | Posted in Finance

Credit cards tend to have a bad reputation and deservedly so. If you can manage to use them wisely, though, they are a great way to save more money.

We all have heard stories of people falling deeper and deeper into debt because of credit cards. Some of these stories are misleading because they involve people who increased their credit card spending as a result of a financial emergency such as the loss of a job. Their credit cards provided a temporary reprieve but in the long run just made matters worse. At the same time, even people who don’t have a financial emergency can mismanage their credit card use. Since credit cards are a convenient form of payment, it’s easy to get over your head and spend more than you can afford. The fact is if you can’t use credit cards responsibly, you probably are better off not using them at all.

On the other hand, if you are financially secure and you are able to control your spending, you can profit from credit cards.

The first thing you must realize is that credit card issuers really want your business. They’re not in it because they like you but because they can earn money off of your credit card use:

If you don’t pay off your bill in full every month, you will be charged very high interest - unless you’re on a limited time 0% APR promotion.
If you pay your bill late, you will be charged late fees that can run anywhere from $30 to $55 depending on your bank.
If you sign up for certain rewards cards, you will be charged an annual fee.
Whenever you use your credit card, the merchant is charged transaction fees. The more you spend, the more the merchant has to pay.

As a credit card user, you should minimize your costs while maximizing the benefits you receive. Minimizing your costs is relatively easy:

Pay your bill off in full every month to avoid finance charges.
Pay your bill on time to avoid late fees.
Don’t use your credit card to buy things you can’t afford otherwise.
Don’t sign up for credit cards with annual fees unless you expect to receive more benefits in return.

You can maximize your benefits in the following ways:

Earn interest.
Earn rewards.
Earn bonuses.

Earn Interest

When you use your credit to pay for purchases, you are in effect taking out a loan. If you manage to avoid finance charges on this loan, you can actually earn interest because you’re keeping your own money in the bank and earn interest on it until you use it to pay off your credit card balance.

All credit cards come with a grace period. That means when you get your monthly statement, you have several weeks to make your payment before finance charges start kicking in. Thus, the easiest way to earn extra interest is to pay off your balance in full every month but to delay the payment as much as possible. That way your own money is sitting in your bank account longer and earning more interest. In effect, grace periods turn credit cards into interest-free loans. Over time, these interest savings can add up to a hefty amount.

Some credit cards come with introductory 0% APR offers on purchases. That means you just have to make the minimum payment , which can be as little as $10, to avoid finance charges. Instead of using your money to pay off the entire balance every month, you can leave more of it in your bank account and earn even more interest. You need to be careful though. The introductory offers usually last anywhere from six months to a year. Once the introductory period is over, however, you will be charged interest if you don’t pay off the balance. It is your responsibility to make sure you have sufficient funds to pay off the balance once the introductory period is over. Note that this strategy also works with low APR offers , not just 0% APR offers. As long as the APR on your bank account is higher than the APR on the credit card, you are earning extra interest. Again, the key to success is being able to control your spending. If you’re just going to use the extra funds each month to spend on things you can’t really afford, don’t even bother.

One thing you should be aware of is that introductory APR offers can either refer to purchases or to balance transfers. As a responsible credit card user, you should never even get into a situation where a balance transfer option looks attractive to you. A balance transfers involves transferring your balance from one credit card to another. In effect, you are paying off all of or part of the balance on one credit card and getting charged for it on another credit card. When you have a high balance and you’re paying interest on it, transferring that balance to another credit card account on which you have to pay little or no interest, even for just a limited time, can save you money. Basically, the balance transfer allows you to refinance your loan at more favorable terms. At the same time, most balance transfer offers still come with balance transfer fees. These fees can be a fixed amount such as $50 or a percentage of the transferred balance such as 3% that can come with or without a maximum. In some cases, these balance transfer fees can turn the balance transfer into a bad deal. You will have to calculate the costs and savings of the balance transfer in advance before you make your decision.

Many balance transfer offers give you the option of depositing the credit card funds in your own bank account. In essence, rather than writing out a check to pay off the balance on your other credit card, you writing out a check to yourself. When the balance transfer fees are absent or negligible and balance transfer offers are abundant, you might be tempted to play the system by taking out substantial loans and depositing them in your bank account to earn interest. There are people who have made thousands of dollars this way by using a dozen or more credit cards and accumulating balances of tens of thousands of dollars in their bank accounts. When the introductory period ends, they just transfer their balance to another credit card to extend their interest revenue stream or simply pay off the balance. Needless to say, if you’re not careful, you can get burnt rather easily. You will need to have the self-control to keep the funds in your bank account instead of using them for other purposes. Also, at some point, the balance transfer offers will stop, so you can’t use this strategy forever. In fact, some credit card companies may blacklist you for doing this. Your credit rating can take a significant hit this way.

Earn Rewards

You’re probably already familiar with this strategy. There are people who earn free flights by using their credit cards to pay for everyday purchases like groceries. Credit cards that give you rewards for using them are known as rewards cards. Typically, the way these rewards cards work is that you accrue points for using them. Purchases in certain categories let you earn points more quickly. For example, an airline rewards card may give you 1 point for every $1 you spend on groceries but $2 for every $1 you spend on airfare.

The points that you accumulate can be used to purchase items from a catalog that is specific to the rewards program your credit card is enrolled in. In most cases, the selection of items you can purchase will include electronics, gift cards, hotel reservations, and airline tickets. In addition, you may also be able to redeem your points for a statement credit or even cash back if you don’t have a balance at all. Usually, the ratio of points to their dollar value is 1:100. That means 100 points are worth just $1 while 10,000 points are worth $100. This can vary, though, for different items - sometimes in your favor (e.g. round trip airline tickets are almost always 25,000 points) and sometimes not so much (e.g. a $50 gift card for 75,000 points).

When it comes to picking the right rewards card, you should know that many of them come with annual fees. If you are a big spender, the rewards you earn may more than make up for the annual fee. If you’re not a big spender, though, you should stick to cards that don’t have annual fees, and there are plenty of them. Also, be aware that the finance charges on rewards cards are typically higher than what they are on other cards. If you’re able to pay off your bill every month, this should not be a problem for you though.

Lastly, as I mentioned earlier, rewards cards will let you earn more points in certain categories. For example, an airline rewards card will let you earn more points when you use your card to purchase airfare. Similarly, a hotel rewards card will reward you more when you use your card to make hotel reservations. If you rarely fly or stay in hotels, then these credit cards are of little use to you. You will want to pick a credit card that rewards you for the kind of spending you do all the time. Most folks are better off picking a rewards card that lets them earn more points in categories such as gasoline or groceries.

Earn Bonuses

Another way of profiting from credit cards is by signing up for cards that offer sign-up bonuses. You heard right. Some credit card companies will actually pay you just to sign up for their credit cards. Typically, these bonuses range anywhere from $25 to as much as $250, with $50 and $100 bonuses being the most common. The fulfillment terms can vary. In some cases, you get a check. In other cases, the amount is applied toward your credit card balance. Sometimes the bonus comes as points which you can redeem for items such as gift cards from the rewards catalog.

Unfortunately, bonus offers are not nearly as ubiquitous anymore as they used to be. The financial crisis has taken its toll on credit card bonuses. Most credit card issuers have either completely eliminated their bonus offers or cut back on the size of the rewards. American Express and Discover are exceptions to that rule.

Recommendations

There are dozens of credit cards out there that you can choose from. I am afraid I cannot tell you which credit cards are the best because that depends on your personal circumstances. In many cases, there is a trade-off involved. For example, a card that offers great rewards may come with high a high APR or even an annual fee. One rewards card may be great if you spend a lot of money on gas; another card may be great if you’re running a small business that spends a lot on office supplies. What I have done is provide you with the information to make an informed decision. It is your responsibility to figure out which card best matches your needs.

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