I have mentioned in previous articles and on my About Page that I like to use my credit card to manage my monthly cash flow.
Just like mortgages can be used to your advantage, credit cards are another debt tool that can have a positive impact on your personal finances. As with those other tools, credit cards just need to be managed effectively.
Credit Card Rewards
We all know that credit card companies offer various reward systems that are designed to encourage use. To the average person, these are effective in creasing spending and making the card companies money. How do I know that? It’s quite simple. If these reward systems didn’t increase usage and profits, the card companies wouldn’t have them. They are in business to make money…period.
These reward systems can be utilized to your advantage and actually save you more money than if you purchased your item with cash, if you’re smart!
Cash Back Rewards
Cash back rewards are a favorite because of their flexibility and ease of understanding. Other types of “points” rewards systems can be obfuscated with black out dates, minimum redemptions, and other “fine print”.
I would highly suggest finding a credit card with a cash back rewards feature. This will allow you to utilize the rewards as you see fit and prevent any headaches from restrictions of use from other point systems.
How To Use Credit Cards To Manage Cash Flow
One reader has suggested what I believe is a very effective strategy for utilizing credit cards to manage cash flow and increase profits. It is designed to work very effectively if you have the will power to manage your credit wisely and pay your credit card balance in full each month.
Here are the steps to set it up:
1.) Set up your main chequing account with a high interest provider.
(I prefer ING Direct because of ease of use and low fees: Sign Up for ING here.)
2.) Have your employer directly deposit your pay into that high interest account.
3.) Find a good credit card that suits your needs and offers cash rewards.
(You can use this no-cost Credit Card service to find the card that is right for you)
4.) Use your cash rewards credit card for all of your monthly purchases.
(You can even set up your utilities and mortgage to be paid with your card in some cases)
5.) Pay your credit card bill in full from your checking account when it comes due.
Why This Works
This concept works very well because it gives you a full 30 days of interest earning power from your bank account every month before your credit card bill is due. This “float” can add up to hundreds of dollars per year in earned interest and does not cost you one extra penny.
Of course, you must be diligent in paying the bill off as soon as it is due – no earlier and no later. You need to leave it until the last day so that you earn the most interest on the money in your account, but you don’t want to be late or you will be paying those pesky high interest credit card rates.
The bonus to all of this is that you are also building up a cash reward stash that is usually paid on an annual basis from the card company. So, on top of earning extra interest each month from the high interest account, you will also be earning cash back from your credit card purchases.
Many credit cards offer 1% cash back and some even offer 2%. Depending on your spending habits and how diligent you are with your credit card purchases, you can rack up several hundred dollars in cash rewards over the course of a year as well.
This strategy should only be applied if you have a strong command of your spending. However, it can also help you to stay on budget because many card companies offer an online service that allows you to download your credit card statement directly into financial software like MS Money or Quicken.
How do you use your credit cards? Do you have any tips or tricks you would like to share?