25 Rules to Grow Rich By #17: Credit Cards

The Simple Dollar is running a series in which we re-evaluate Money Magazine’s “25 Rules To Grow Rich By”. One “rule” will be re-evaluated each weekday until the series concludes; you can keep tabs on the action at the 25 Rules index.

Rule #17: The best credit card is a no-fee rewards credit card that you pay in full every month. But if you carry a balance, high interest rates will wipe out the benefits.

This rule is absolutely correct in that you should be using a rewards card with no fees and you should be paying off the balance every month. There’s pretty much no other way to use credit cards without a significant loss.

However, this rule is not quite specific enough. It ignores the fact that many rewards cards are just not all that rewarding. The offers sound pleasant, but often you earn 1% or less return on the rewards and many rewards programs are nearly useless for the vast majority of users.

The fact of the matter is you should expect at least a 1.5% reward in a form that you will actually use. If you’re getting below that, I can virtually guarantee that there are better rewards programs out there for you.

I usually use the CitiBank Driver’s Edge Platinum Select card as a baseline for my rewards card comparisons. You earn a 6% rebate on supermarket, drugstore, and gas station purchases in the first year (3% after that), and 1% on all other purchases, plus a $1 rebate on every 100 miles you drive (which you prove using maintenance receipts). These rebates aren’t directly in the form of cash, but are used when you do maintenance, service, or repair on the vehicle assigned to the card. You can also get the rebate if you buy a new car in the next five years. In short, if you perform regular maintenance on your car or acquire a new one, this card will pay for a solid portion of it.

If a credit card offer can’t exceed this one (and not many can), you shouldn’t be using that reward program. Let’s rewrite that rule.

Rewritten Rule #17: The best credit card is a no-fee rewards card that can earn you at least 1.5% in return that you pay in full every month. But if you carry a balance, high interest rates will wipe out the benefits.

You can jump ahead to rule #18 or jump back to rule #16.

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6 thoughts on “25 Rules to Grow Rich By #17: Credit Cards

  1. Jag Nogg says:

    Using no credit card is actually the best way to go, in my opinion. You can use a Visa Debit card everywhere Visa is accepted.

    It’s impossible to get into credit card debt if you use debit every time and it teaches you to live within your means.

  2. J.D. @ Get Rich Slowly says:

    I agree. The best credit card is no credit card. I know I’m in the minority, though.

  3. KalluMama says:

    I think using a credit card is great. I have been using my capital one CC for sometime now and I make sure to put all my expenses on one card. The only thing is i pay 100% every month and carry no balance.

    Doing this gives me so many points. I have already earned enough points to get 2 ipods for free! If you have the discipline then there is no better way.

  4. Dannyboy says:

    Change credit cards whenever you can get a better rewards deal and use more than one if they cover different things. I currently have 3 cards. Chase Rewards (5% on gas, groceries and drugs (no longer being offered)), American Express/Costco (3% on restaurants, 2% on travel) America Express/Fidelity 1.5% deposited into a Fidelity 529 plan on everything else). These cards all pay CASH rewards — I avoid “thank you points” and airline rewards cards. I pay everything I possibly can with these cards and rarely use cash. BUT DON’T USE ANY CARDS IF YOU DON’T PAY THEM OFF IN FULL EVERY MONTH!

  5. Bill says:

    Debit cards are convenient for the bank, not the customer.

    There is very little consumer protection compared to a credit card (where your maximum liability for any unauthorized use is $50)

    With a debit card, there are very short time limits

    If you don’t report the unauthorized use of a debit card within only a few days, your liability increases substanitally.

    In as little 2 months you can lose your entire account balance if you don’t report the unauthorized use to your financial institution.

    Some issuers have adopted policies similar to credit cards, but those are strictly voluntary and could change at any time (the credit card limit is law)

    I’m a former banker, and would never have a debit card.

    If you use a debit card, I suggest linking it to a separate checking account and keeping the balance low enough that it wouldn’t be a catastrophe if you lost the entire balance in that account.

    And for that account, be sure to disallow any automatic transfers from another account (_don’t_ get “overdraft protection”)

  6. Kris says:

    Usually your posts are good, but this one… not so much. Using credit cards is not a way to grow rich, PERIOD. Only people who think they can outsmart the credit companies think that and none of them are rich.

    @ Bill, if you use your bank debit card as a credit card when paying ( as most people do ) then you have the same protections as a credit card.

    In any case, the absolute best way to pay is with CASH. You don’t have to worry about overdraft protection, accidental charges, stolen number etc..

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