If You're Going To Use Credit Cards

Everybody loves free stuff, and one popular way to get free stuff is by using credit cards that pay rewards on purchases. This can be fun and, potentially, earn you thousands of dollars worth of rewards every year, but only if you’re responsible with handling your money.

Before I continue, let me state that I am NOT advising anyone to take on credit card debt. Credit cards can be detrimental to your financial health if you can’t pay them off, live paycheck to paycheck, don’t have - and stick to - a budget, or you don’t have a substantial emergency fund.

But if your finances are in order, it can be a great way to get some extra perks from the money you already intend to spend.

Here are four rules for using a rewards credit card responsibly:

1. Pay off your balance every month. Carrying a balance will defeat the purpose of having a card for points because the interest rate will eat you alive. Some people deliberately carry a balance because they think it helps their credit score, but this is not true. Paying it off every month will not hurt your credit score, and could improve it. Plus, the free stuff you’re getting isn’t free at all if you create debt to get it.

2. Monitor and manage what you spend. You must be disciplined about knowing what you’re spending, how much you have in the bank, and what you’ll be able to pay off at the end of the month. To some people this comes naturally, but if you need ideas on how to handle it, there are a couple of ways you can do it. The easiest way is to use a check register to record your bank balance and your purchases the same way you would if you were using a debit card. If you really don’t trust yourself, you can start by moving enough money to cover your purchases from your checking account to a savings account every time you buy something, then moving it back at the end of the month to pay the bill.

3. Don’t buy things you don’t need, even for “bonus” points. There's no benefit to spending money just to get points, so only buy things you would buy even if you weren’t earning rewards. If your card is offering double the points this month on purchases at Home Depot, don’t go there and buy a bunch of things that aren’t already on your shopping list. The benefit does not outweigh the fact that you spent money unnecessarily.

4. Start small. Evaluate your monthly cash flow and start by charging necessities that are a line item on your budget, such as gas and groceries. If you are able to do this and pay off the balance every month for a few months, then you can start charging other things as long as you continue to follow rules #1 and #2.

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Helpful Resources

• If you don’t have a budget, or you need a better budgeting system, mint.com is a user-friendly site that make it easy to create your budget and manage your money.

• nerdwallet.com has a credit card rewards comparison tool to help you find a card with all the features you desire. You enter information like whether you want a card with no annual fee, the type of rewards you prefer (travel, cash back, etc.), and how much money you spend in certain categories, and it will give you a list of cards that meet your requirements.