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(Steve is a guest blogger from Think Save Retire.)
If you are a traditional American, you probably have a credit card. In fact, you most likely have a pretty wide collection of those colorful and handy cards ready and willing to support your purchases. And while credit cards can sometimes get a bad wrap, believe it or not, using those cards instead of cash is certainly not all negative. In fact, credit cards can actually wind up saving you plenty of cold hard cash!
After all, if your wallet is stolen, it's tougher for a thief to successfully use your credit cards than cash. Using plastic also establishes a credit history for larger purchases, like cars and homes. Cards also provide bonuses and incentives (points) if used the right way.
The key to saving money by using credit cards is understanding what your cards offer you. Believe it or not, those cards in your wallet might be itching to give you some money back!
Related Post: No, Credit Cards Aren't Evil
With all the credit options available, how can consumers maximize their frugality by using credit cards instead of cash? Here are three crucial strategies to take full frugal advantage of your colorful plastic.
Points are a big deal in the credit card industry. Points can be redeemed for discounts at many retail establishments. Points can also be transferred into airline miles for extremely low-cost airfare (my wife and I flew to Glacier National Park in 2015 for $11.20 each).
For example, as of this writing, the Southwest Rapid Rewards Premiere Card offered by Visa shells out 25,000 bonus points after spending $1,000 in the first three months of owning the card. The Capital One Venture One Rewards card gives 20,000 bonus points after the first $1,000 is spent in the first three months. The Chase Sapphire Preferred Card offers a whopping 50,000 bonus points, but requires $4,000 to be spent in the first three months.
In addition to these bonus one-time points, point-generating cards generally offer 1 point for every dollar spent, and some will double, triple or even quadruple your points-to-dollars ratio for particular purchases, especially travel.
Ultimately, all these points add up to more buying power for future purchases.
But wait! The key to maximizing your frugality is by resisting the temptation to spend any additional money for the sake of point accumulation. Don't fall into the trap of blowing through extra money just to watch your point total grow. Similarly, only spend those points on items that you would have purchased anyway.
In other words, use the points strategy to assist in your regular spending habits rather than using the points to support "extra" purchases. This is how to remain frugal.
The interest incurred with most credit cards is enormous, and credit card debt is a spiral all too easy to fall into. The failure to pay off credit cards - in full - every month saddles the average household with more than $15,000 in debt. Total revolving debt in the United States, of which credit cards are most responsible, has skyrocketed to $925B.
Hardly the mark of frugality!
The key to keeping in line with your frugal senses is to think of your credit card as cash. Research has shown that people tend to spend more money when paying by credit card than by paper money. Psychologically, handing over paper money has a bigger impact on our understanding of how much money we spend. Credit masks that. Naturally, this is bad news! But, the fix is easy.
Related Post: The Difference Between Being Frugal and Being Cheap
Remember to use a credit card as a means to pay for items without the need to carry around a bunch of cash rather than an ability to purchase more stuff, or stuff without having the funds to pay for it. If we cannot pay off our credit card(s) at the end of the month, then we are probably spending too much money. Challenge yourself to avoid running a month-to-month balance on your plastic for at least a year. Every month, pay that sucker off!
You will probably find that this new spending habit will become part of your lifestyle going forward, making the possibility of incurring credit card debt a thing of the past.
Perhaps the biggest advantage of all, credit cards offer a whole slew of perks to the consumer that most of us never think to take advantage of. For example, some credit cards offer extended warranties on products that we buy - completely free of charge. Other credit cards offer price-match guarantees for customers who find a lower price on the item within 60 to 90 days of a purchase, and many credit card companies will even reimburse you to replace lost or damaged cell phones, airline luggage, laptops and more.
In addition, the majority of credit card companies offer customers rental car insurance coverage that is beyond what your auto insurance policy covers, as well as free checked bags when you travel. Others, like Merrill Lynch, make free admission to museums and other venues throughout the nation available to their customers, as well as help finding tickets to events that may already be sold out, along with general concierge services.
Many will also provide identity theft protection as well as free credit scores.
Perks vary widely from company to company, so always look online or call your credit card company to confirm the details of what they offer. For example, even with those companies that offer a price-match guarantee, the number of days after purchase can vary, and the details of auto insurance coverage is quite often different between credit cards.
Find out what your credit card companies offer and make sure you understand how to use those perks to their full potential, because very often, our credit cards can serve as wonderful tools to a frugally-minded consumer.