There are plenty of instances where it's a bad idea to charge purchases to a credit card, but that isn't always the case. In many situations, using your credit cards can make a lot of sense. We asked three of our writers to each describe one.
Matt Frankel: It can be smart to use your credit card to get rewards or points as long as you meet two criteria. First, the cost of the card's annual fee must be substantially less than the rewards you expect to earn throughout the year. Second, you need to pay your balance in full every month.
Continue Reading Below
For example, let's look at the American Express Platinum Delta SkyMiles card, which I use frequently. The card has a seemingly high annual fee of $195, but included with that I get a free checked bag for me and whomever else I'm traveling with (worth $50 per trip per person), and each year I get a "companion certificate," which is essentially a "buy one, get one free" flight. These benefits alone more than justify the cost of the card, and that doesn't even include the miles I earn when I use it.
Perhaps even more importantly, rewards cards make sense only if you pay the balance in full each month. Let's say I charge $1,000 worth of purchases this month, which gets me 1,000 Sky Miles (worth roughly one cent apiece, depending on whom you ask). If I even carry the balance for one month at 15% interest, I'll end up paying more in interest than the miles are worth.
So go ahead and consider a rewards-based credit card, but be smart about it if you get one.
Jason Hall: As Matt said, rewards are great, but one of the best credit card perks out there is cold, hard cash back. If there are specific stores that you find yourself spending a lot of money at on a regular basis, it can really add up. Such is the case for my family and Amazon.com, where we spend thousands of dollars a year. We recently opened an Amazon Visa card, from JPMorgan Chase & Co., and we now get 3% cash back on all Amazon purchases. I use another card for travel-related expenses, netting 2% cash back for airfare, hotels, and car rentals.
Of course, the key to getting these programs to work to your benefit is to pay off the balance each month to avoid interest charges, while also making sure any annual fees don't cost you more than the benefits you get.
The biggest risk with these programs is not falling into the trap of buying extra stuff and ending up in debt. These programs work for my family only because we're disciplined about our budget and avoid impulse purchases using credit cards. Those can add up quickly and leave you buried in high-interest debt before you know it.
Eric Volkman: As someone who once lived abroad and has never fully suppressed the instinct to wander, I think one excellent use of credit cards is for traveling.
The most obvious benefits of vacationing on credit are the prizes you can get for doing so. Whipping out the plastic habitually when away from home can quickly rack up points or miles. Card issuers are well aware that travel rewards are a top draw for many of their clients, so rewards programs tend to be generous with offerings on flights, hotels, vacation packages, and so on. Using the right card, it's not difficult to accumulate enough points or miles for a free plane ticket or hotel stay.
Many credit cards offer travel perks that are rarely or never available with debit products or cash. These amenities include rental-car discounts, late checkout at certain hotel chains, low- or no-cost travel medical insurance that might even include emergency evacuation in case of a nasty accident, and other helpful extras. The list is long, and a good card will offer at least several attractive ones for any kind of traveler.
It pays to shop around for such a card; there are many, and they vary considerably in terms of annual fees, limits, perks, and the like.
The article Using Your Credit Card Is a Smart Move in These 3 Instances originally appeared on Fool.com.
Matthew Frankel owns shares of American Express. The Motley Fool recommends Amazon.com, American Express, and Visa. The Motley Fool owns shares of Amazon.com, JPMorgan Chase, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
Continue Reading Below