By Steve Tepper, CFP®, MBA
One of the easiest ways to get in big financial trouble is to fund your lifestyle on credit—by running up big balances on your credit cards, up to maxing them out.
For many reasons (loss of job, health emergencies), a line of credit can be a last-resort lifeline, but for many others, it is an “unforced error” as they say in tennis, a big financial mistake.
Annual interest rates average around 18% for credit cards,¹ and many are well over 20%. Run up a few thousand dollars on a card like that and your monthly debt service (interest charges) will soon become a sizable part of your budget.
Your best choice, then, if you find credit card cash has become a necessity, would probably be a card with the lowest interest rate you can find, mindful that it might have a larger annual fee than other cards. A card with a very low introductory fee can save you big dollars if you feel confident you can pay off the debt within the six-month or one-year period—but be careful. Once that intro period expires, the rate will rocket up.
On the other side of the plastic, there are perks to using credit cards if you can pay off the balance each month. Most cards offer rewards for usage, from airline miles to free fill-ups to cold hard cash back. You don’t get any of that when you use your debit card, write checks, or pay with cash.
Choosing the best card depends on your preferences and expenses, as different cards offer different levels of reward on particular categories of purchases. For example, the American Express Gold Card gives 4x rewards on restaurant charges and 3x rewards on air travel, so if you travel and dine out a lot (in a normal year), that might be a good choice.
Here are a few cards and their rewards, per thepointsguy.com:
Other terms and conditions and restrictions may apply. Always read the terms and conditions provided by the card issuer.
One type of card I excluded from the list is the travel miles card, like Capital One Venture Rewards. My research tells me those rewards are not always what you expect, as blackout dates and small inventory can make it very difficult to redeem your points for flights you want on dates you want. Plus, the issuer reserves the right to change the redemption values at any time. Imagine finally saving up 60,000 points for your dream trip and being told it now costs 90,000.
My advice is avoid miles rewards with a good old-fashioned cash-back card. And tell Jennifer Garner, “Its none of your business what’s in my wallet.”
Footnotes:
1. wallethub.com