Credit cards are one of the most ignored tools of frugal living. This is so because the credit card, bless it, has an undeserved reputation as a bad guy in the world of consumer debt. It is a most unfortunate (and costly) misperception because, when used properly, the credit card is a sure-fired way to save your hard earned money.
Now, let me pause here and provide a much needed caveat. If you are new to the world of frugal living and carry a credit card debt, then this strategy is not for you. The credit card naysayers are absolutely correct in their belief that few things are worse to a consumer than credit card debt. If you are not paying off your entire credit card balance each month, you must knock that carry over balance out, in full, before making use of this strategy, as eighteen percent APRs have no place in a frugal lifestyle.
Now, having said that, lets explore some of the many benefits of the credit card. First is the cash back rebate. We can all thank the Discover Card for bringing us this wonderful benefit, which gifts to the consumer a rebate, typically in an amount of one percent, sometimes more, of the total purchase price.
Since Discover Card popularized the cash back rebate thirty years ago, other card issuers have felt compelled to follow suit. In fact, a wonderful competition has resulted, with issuers boasting various nuances to the concept. Some offer more than one percent. Capital One, for example, offers 1.5 % back on purchases. CitiBank gives you two percent, with one percent upon purchase and one percent on payment of the bill. Still others, such as Discover and Chase Visa, offer, in addition to one percent on all purchases, a full five percent on purchases within a quarterly category. As an example, for three months each year, these issuers provide fiver percent cash back for gasoline purchases. Grocery purchases are a category during another quarter. How great is that – five percent back on necessities of daily living?
It actually gets better. With Discover Card, for example, you have the option of redeeming your cash back bonus credit for merchant gift cards of a greater value. You might trade in $45 of cash back bonus for a $50 gift card to your favorite restaurant. This used to be a better feature with greater benefit, but, still, that’s another ten percent bonus for you.
This cash back benefit alone makes it something of a no-brainer to use credit cards on virtually every purchase. It’s like carrying around a one to five percent coupon on everything you buy — with no clipping and filing required. And just think how large this amount accumulates in a given year. At just one percent, if you spend $25,000.00 a year on your family’s groceries, restaurant visits, gasoline and vehicle maintenance, clothes and shoes, doctor bills, prescriptions, etc., you are looking at $250 back in your pocket. Add in the rotating five percent categories, and that number can easily approach one thousand dollars of found money annually. Pay attention and you will notice that credit cards can be accepted on just about anything you have to pay nowadays, and you should take full advantage of this option.
Again, this approach only makes sense if you pay the credit card off each month. Obviously, an 18 to 20% APR will leave you in the red if you don’t. But if you have sufficient income to cover your expenses (and any frugal person should), then this is the way to go.
There are still other benefits to the credit card that people overlook. I’ll get into those and a few strategies for effective credit card use in my next post. But for now, put your cards to use and maximize the savings.