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How Do I Use Credit Cards Strategically?

Dear Gary,
Now that I completed the program and eliminated all the debt that was causing me problems, I’d like to get back to using my credit cards… as long as I can do it in a way that doesn’t set me up for another failure. Do you have any tips for using credit cards in a way that won’t hurt my budget?

Jeannie S. Omaha, NE

An expert answer from Gary Herman

Hi Jeanie,

Thanks for writing in and it’s a great question. People often think that as president of a credit counseling company, I’d advise people to stay away from credit cards entirely. But I think if you can use credit cards strategically and manage your debt effectively, you can enjoy all the benefits of credit cards without risking debt problems. I call this as a Credit Cards 201 strategy. Once you get control of your debt, you can advance to a higher level with your cards.

Essentially, this involves a delicate balancing act for managing the debt you incur on each card you own. So, you don’t just pull out a rewards credit card for every purchase. You choose always choose the card that makes it easiest to pay off the debt incurred.

Using credit cards interest-free

The best way to use credit cards is to never pay interest on the charges you make. And there’s one very easy way to do that with any card you have, regardless of the interest rate on the card. Every credit card has a grace period, which is a period where interest charges don’t apply to the purchases you make.

On most cards, it matches the due date of your payment. So, if you pay off the balance in full by the due date, interest won’t apply. But this only works if you start the billing cycle with a zero balance. If you already have a balance on a card, then interest starts to accrue on every charge from the moment you make it.

But it means if you start and end every billing cycle with a zero balance, you never pay interest. It’s the best way to use credit cards, although it’s worth noting this only applies to purchase transactions. Never use that cash advance feature on your credit cards. The rate is much higher and there is no grace period.

How to use rewards credit cards the right way

One of the best uses for rewards credit cards is for expenses that are already part of your daily budget. So, you have to spend money on groceries, so it makes sense to earn cash-back on those purchases. The same thing is true with gas.

But this is only true if you can pay off those charges in full every month.

If you charge too much in one billing cycle on a rewards credit card and can’t pay off the balance quickly, then any rewards earned can be offset by high interest. So while you may earn 5% cash-back on dining and 3% on gas, those rebates will be less than the interest that’s added if you pay off the debt slowly. The longer it takes to pay off charges, the more you pay for them.

When using credit strategically, these small daily purchases can be put on credit to earn the rewards, but then you MUST have money allocated in your budget to pay off the card balance in-full in that first billing cycle.

Large purchases are often best on low APR cards

Swipe a credit card

Larger purchases can be put on credit so you can pay them off over time, but they should always be put on a credit card with the lowest interest rate possible – in other words, these purchases are usually not a good option on a rewards credit card. Ideally, purchases that take time to pay off should be put on a card with a 0% APR introductory interest rate. Then you just have to pay off the balance before that introductory period expires.

Of course, in order to qualify for 0% APR credit cards with the most attractive introductory periods (those that run up to 18 months), you need to have a good credit score. This may also be true of the best reward credit cards.

If you don’t have a 0% APR card, then the next best thing is a credit card with low APR or a low-interest rate. With good credit, you can qualify for a card that offers low interest, ideally 15% or lower. That’s much lower than most reward credit cards.

Then you budget carefully to pay off the balance within two to three billing cycles. Your goal should be to pay it off as quickly as possible.

And that’s not to say that you cannot use a rewards credit card for a big purchase. But you need to save up for that big purchase first. You would budget and save up a few months ahead of the purchase. Then you use the rewards card to pay for it and use your savings to pay off the charge immediately. In this case, rewards cards can make sense for large purchases.

Be smart with balance transfers

Another smart way to use credit cards when you have good credit is to take advantage of balance transfers. If you see that you have a few balances spread across multiple cards then don’t wait for the debt to get out of control before you take steps to rein it back in.

Balance transfer cards also offer 0% APR periods if you have good credit. You can transfer your existing balances to the new card and then pay them off interest-free. Just make sure you budget to pay off the balance in full because if you don’t, the rate can be just a high as it was on your original cards.

Crawl before you walk with credit

If your credit score is low because of previous problems with debt, then you need to take baby steps to rebuild your credit before you can implement a strategy like the one described above. You may need to use a secured credit card and make a small number of purchases on credit every month and then pay off the debt in-full. This will help you build a better credit score over time. Once your credit score is higher, you can use bigger and better cards strategically.

As long as you keep these kinds of things in mind when you use credit, your credit cards can be a key part of a healthy financial outlook. It’s only when you start to rely on credit to get by or lose control of managing the debt that you run the risk of causing financial distress.

If you have debt or credit questions, just ask us! Our certified credit experts will be happy to answer.