As I contemplated changing my everyday credit card to the Chase Freedom card; I’ve been pondering one of my favorite financial topics…credit card strategy. In other words, how does one maximize the benefits of credit cards—mainly short-term interest free loans (when paid-in-full), purchase protection, and rewards—while avoiding both credit cards’ inherent dangers and the temptation to collect dozens of cards, one for every specific use?
Here, I’m going to suggest four spending styles and the kinds of plastic that might be best for each. The spending styles are:
- The Everyday Spender. Uses one credit card to pay for everything, everyday.
- The Big-ticket Buyer. Uses credit cards only for big purchases like furniture or travel (airfare and hotels).
- The Budget Watcher. In debt and/or living paycheck-to-paycheck. Needs to watch every dollar.
- The Business Traveler. Uses a credit card for expenses that will be reimbursed like airfare, meals, and hotels.
Before diving in, I want to cover a couple of assumptions I make.
Assumption one: A thin wallet is best.
If your goal is to squeeze every rewards penny possible out of the credit card system, then you’ll need more than one rewards credit card. Having a dozen credit cards may not bother you. Personally, I want to carry as few cards as possible.
In an earlier post, I talked about paring down your credit cards to two with minimal impact on your credit score. But that post didn’t take rewards into account, and the simple truth is that most people are going to select an everyday credit card based upon the rewards it offers…myself included. So all else equal, this post assumes that fewer credit cards in your wallet are better, and when possible, the cards should be rewarding.
Assumption two: It’s best to pay in full, but…
To be clear, I learned the dangers of racking up credit card debt the hard way, so the only responsible way to use credit cards is to pay off what you charge, in full, at the end of every month…which is what I do now.
That said, there are many people that carry credit card balances strategically. They may finance the purchase of furniture or an appliance using a 0% intro APR or a very low rate card even if they have the cash in the bank. Again, I personally never want to carry a credit card balance again, but I know that many use cards this way.
The “Everyday Spender”
The Everyday Spender uses a card for everything. Coffee, utility bills, airfares, you name it.
Most months her credit card bill comes in around the same amount, but if she made a few big purchases one month it may come in higher. Either way, she has the cash in the bank to pay the balance in full every month. The Everyday Spender never pays finance charges. By putting everything on her credit card, she gains short-term cash flow benefits, purchase and fraud protection and, of course, rewards on every purchase.
To become an Everyday Spender, you should be debt-free and have a good cushion of cash in the bank so you never end up with a balance you can’t pay off.
The best cards: The best credit cards for everyday spenders are the ones with the most generous cash rewards programs like Chase Freedom, Discover it, and the Blue Cash Everyday Card® from American Express. At the moment, my pick might be the Chase Freedom. Because it’s a Visa card, you can use it everywhere, and you’ll likely benefit from the 5% cash back on certain spending categories every quarter. Another card to consider is the Fidelity Investment Rewards American Express card, a fee-free card that offers a flat 2% reward on all purchases in the form of cash transfers to an eligible Fidelity Investments account.
The “Big-ticket Buyer”
The Big-ticket Buyer prefers to use cash or a debit card for bills and everyday small purchases, but puts the big stuff like furniture, appliances, electronics, and travel, on credit.
He knows this is a smart move because of the purchase and travel insurance many credit cards provide that debit cards do not. Although he might like to be rewarded for these purchases, rewards aren’t his first concern. He sometimes, however, wants the option of paying off the big purchase over a few months, so a low regular APR is important.
The best cards: It all depends on how much you’re going to charge on the card and whether you will ever carry a balance. If you only spend a couple thousand a year on the credit card, you won’t earn many rewards, and if you carry a balance for even a month or two, the interest charges will start to eat away your rewards. A good card at the moment is the Citi® Diamond Preferred® Card, which offers a 0% APR on purchases and balance transfers for 18 months. You may also want to check with your local credit union; many offer no-frills, no-rewards credit cards with regular APRs under 10%.
The “Budget Watcher”
The Budget Watcher is still getting on his feet financially. He may have some old credit card debt left to pay off and/or he may be living paycheck-to-paycheck.
In other words, he doesn’t have a designated emergency fund or a cushion of cash to tap in the event of an unexpected expense. The Budget Watcher’s sole goal should be to save enough to create this cushion, get out of debt, and develop a proper emergency fund.
As I know from experience, if you’re living paycheck-to-paycheck, paying off your credit card every month may not always be possible, despite your best intentions. So Budget Watchers will get better financial control with a debit card or a charge card .
The best cards: The PerkStreet rewards debit card provides credit-card like rewards with a fee-free debit card. Alternately, the Zync Card from American Express is a charge card (meaning it must be paid in full every month) that provides rewards and some additional benefits for a $25 annual fee. I used a charge card for my everyday spending as I was watching my budget, getting out of debt, and building up savings, but in reality I think I merely broke even between the rewards I earned and the annual fees I paid.
The “Business Traveler”
The Business Traveler needs to make purchases on behalf of her employer, submit an expense report, and get a reimbursement check.
She may have a credit card for personal purchases, but she’s also decided to carry one just for reimbursable business expenses. Most often, these expenses include lots of travel: airfare, hotels, and rental cars. It’s possible to spend $15,000 or more a year just on company travel.
The best cards: Frequent business travelers who get to charge their own expenses are probably the only ones who should consider airline and hotel loyalty credit cards that charge an annual fee. If you can a) charge your own business travel, b) be loyal to one airline or hotel chain, c) have the accompanying credit card, you can earn travel rewards that blow any annual fee out of the water. Choose the card based upon the airline or hotel you use most. Some top cards include:
- Gold Delta SkyMiles® Credit Card from American Express
- Starwood Preferred Guest® Credit Card from American Express
Or, opt for a general travel rewards card like Chase Sapphire. Just don’t carry a balance on these cards, as the regular APRs are super high.
What about you? What credit cards do you carry, and why? How do you use them? How did you choose them?
Disclaimer: This content is not provided or commissioned by American Express. Opinions expressed here are author’s alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.