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Before I start, I need to preface with the following: none of the below will work if you do not pay off your credit cards in full each month. A credit card is an interest-free loan for up to 30 days each month and after those 30 days, the interest rate skyrockets. You have to practice self-restraint and charge only what you can fully pay off at the end each billing period.
With that out of the way, let’s get to it. Credit cards are incredible financial tools that, when utilized properly, can help you gain benefits ranging from fraud protection to primary car rental insurance to cash back on your weekly grocery bill to affordable travel in international business class. In addition, my aforementioned point about credit cards being a loan reflects arguably the most important part of credit cards: protection from fraud. Whenever you charge anything to a credit card, you are spending another bank’s money. If your card number gets stolen and the card gets used fraudulently, that’s the bank’s money being used, not your money. It’s much easier to dispute charges on a credit card and not pay them until a resolution is reached, rather than have to go through the ordeal of having your bank give you back your own money because your debit card number was stolen and used elsewhere. I never carry my debit card on me; it sits tucked away in my financial drawer and I only pull it out if I have to make a deposit or withdraw cash. Otherwise, it’s credit cards only.
Further, contrary to popular belief, it is not bad to have numerous credit cards open. A major component of your credit score (about 30-40%) is your debt to credit ratio; the lower the better. As long as you pay off your cards in full each month, opening more credit cards will dilute this ratio. I currently have ten credit cards and a debt to credit ratio that hovers around 3%. A debt to credit ratio of under 20% is great, while a ratio under 10% is ideal. Further, while opening a credit card will temporarily lower your credit score by 10-20 points, that score will rise back up within a few months because the pull ding will be offset by the decrease in your debt to credit ratio. Unless you’re planning on buying a house within the next year or two, you can safely open 2-3 cards a year. I’ve opened two cards this year and my score sits firmly at 807.
Finally, the fun part: accumulating and using rewards. I’ll begin by splitting credit cards up into two main rewards categories: cash back and travel rewards. Cash back cards are the best way for beginners to get in the game, develop good card habits and benefit from some perks, although the best ones are definitely reserved for travel. My two favorite cash back cards are the American Express Blue Cash Preferred card and the Chase Freedom card. I use the American Express for all my grocery shopping. The card comes in two variants: the free version (called “Blue Cash Everyday”), which includes 3% back on groceries, 2% back on gas and department stores and 1% back on everything else and the Preferred card, which has a $95 annual fee, but its rewards category rates are doubled. Run some numbers and see which suits you best – I started with the Everyday, but now that I live with my girlfriend and we have a higher grocery budget, I use the Preferred. The break-even point is about $264/month. If you spend less, get the Everyday card. If you spend more, get the Preferred. As an example, if you spend $250 on groceries a month and get the Everyday Blue Cash card, you’ll earn $90 back per year just from buying groceries. If you spend $350 per month and get the Blue Cash Preferred, you’ll make $157 a year in cash back. That’s free money.
The other cash back card that I really like is the Chase Freedom due to its rotating 5% back categories. Every quarter, there will be certain categories that will give you 5% back on all your spending up to $1,500. So for example, this card had gas (among others) in Q3 and this quarter one of the categories is wholesale clubs. You also get 1% cash back on all other purchases so it’s a pretty solid everyday spend card. If you can’t make use of the various 5% cash back categories, I suggest looking into the Chase Freedom Unlimited. With this card, you get 1.5% back on all purchases without any quirks.
My favorite travel card, by far, is the Chase Sapphire Reserve. Yes it has a $450 annual fee, but that fee cancels itself out extremely easily, especially your first year where you’re eligible for the 50,000 Ultimate Reward point bonus. This card comes with a $300 travel credit, which is good for literally anything: Uber, plane tickets, bridge toll, bus pass, etc. so the net cost is $150. This is further offset by the Global Entry/TSA credit and the Priority Pass that comes with the card. This pass, which is active for as long as you have the card, will let you and up to three guests enter numerous airport lounges worldwide for free. Most US airports have at least one, if not more, and most international airports have these as well. These lounges have showers, food, anything you may need before, during or after long travel. The card also has other perks like price protection and primary car rental insurance, so that if you ever rent a car and pay for the rental with this card, you’re fully covered in case you get in an accident.
The card also lets you redeem Ultimate Rewards for travel at a 1:1.5 ratio. So that $300 flight to NYC suddenly costs 20,000 points. Since the card earns 3 points per dollar spent on things like restaurants and travel, you’re basically earning the equivalent of 4.5 cents per dollar spent when you redeem on things like flights or hotels. The best redemption rates, however, are when you transfer points to airlines and book awards that way. It’s how I was recently able to use 126,000 points to book a business-class flight from Europe next summer for my girlfriend and me. If I were to buy these tickets outright, they’d easily be $3,500 each, if not more, so the redemption value is ridiculous. However, because this post is already long enough, I’ll go into detail for how those award bookings work in another post.
Feel free to ask any questions you may have in the comments and I’ll try to address them. I’m also open to suggestions for what to write about next time besides the travel award bookings..