For 401k savers who have self-control and financial discipline, credit cards can be fantastic tools to supplement their savings program. The key to effective credit card use is to pay the entire balance due each and every month to avoid any finance charges. If you can succesfully manage your credit card use, you will find your credit card to be a powerful ally for your savings campaign.
Here are nine ways that savvy credit card users can bolster savings:
- Cash Rewards – There are several no-fee credit card that pays at least 2% cash on all purchases.
Using these cards wisely for purchases like groceries, utilities and other routine items can generate significant savings. I like the Fidelity 529 Rewards Card since my immediate savings goal is college tuition for my children. But Fidelity also has a 2% card that pays rewards into a retirement account. Charles Schwab has a similar 2% card that pays into a brokerage account.
- Pay at the Pump – I use a second credit card strictly for gasoline purchases since it pays 5% rewards for gas paid for at the pump.
The card I use here is the Pentagon Federal Visa Platinum Rewards Card which pays 5% on gasoline purchases made at any gas station. Besides the 5% rewards, I find that the habit of paying at the pump also adds to savings by helping me avoid the impulse purchase tempatations found in gas station convenience stores.
- Returns – Paying with a credit card allows you to return merchandise without a receipt. I recently found myself in a situation where I needed to return some things but could not find the receipt. Because I knew the credit card I had used, a full refund was credited to my account. Stores now cross-reference credit card purchases with UPC codes making receiptless returns possible. Credit cards make it easier than ever to return unwanted items and tap an often overlooked source of savings.
- Float – With credit cards, you make cash outlay for your purchases on (or before) the due date of the card statement – i.e. several days or weeks after the purchase is made. This float time allows you to keep your money in an interest earning account longer than if you paid with cash, check or debit card. Over time, earnings on the “float” adds up and is significant.
- Fraud and Theft Protection – Credit cards offer far more protection against fraud and theft than other payment forms. With cash, checks and debit cards, if an unauthorized party is able to access your funds, you have very little recourse. Credit companies, spurred by federal and state regulations, have broad coverage against fraudulent use. Here’s what MasterCard’s policy says:
With MasterCard’s Zero Liability policy, you’re protected from fraudulent uses on your account. You pay only for purchases that you have authorized on your MasterCard card. As long as your account is in good standing, you have exercised reasonable care in safeguarding your card, and you have not reported two or more unauthorized events in the past twelve months, unauthorized purchases are not your responsibility.
Additionally, credit card companies are very proactive in combatting fraud since it is a major problem for them. On several occassions I have received phone calls from my card company inquiring about transactions that had triggered suspicion in their fraud prevetion unit.
- Buyer Protections – Buying with a credit card can give you more leverage than other payment forms in the event you have a billing dispute with a seller. If you pay up front for something (mail order, for example) with a check or debit card and the goods are never delivered, it’s pretty much up to you to do the work to get your money back. With a credit card, you will have to complete some paperwork to file a dispute, but you will find that the credit card company may be far more effective in getting the retailer’s attention (and a response) than you are on your own. Also, many credit cards provide extended warranty coverage on products. Typically these programs double the product manufacturer’s warranty period up to one year.
- Identify and Control Cash Leakage – I use my credit card for even the smallest incidental purchases (e.g. a soda or pack of gum). Why? For one, I like to get rewards whenever possible. But even more important, using the credit card gives me a free, no-hassle way to track and account for these purchases. The cumulative leakage caused by small cash purchases can easily become a budget buster. Getting a neat, printed summary of these purchases each month helps identify problem areas, modify spending behavior and save even more.
- Ability to Grab Great Opportunities – Great sales and great deals don’t always coincide with payday. Savvy use of a credit card gives you added flexibility to take advantage of a great deal even if you don’t have funds at your ready disposal. Of course you still need have funds to pay the credit card bill when due.
- Free Insurance – When you rent a car you’ll be “encouraged” by the rental agent to purchase insurance through the rental company. One survey says that 34% of renters buy the additional insurance just to make sure they’re covered. Many credit cards provide coverage (usually secondary to your main auto coverage) that may make it unecessary to purchase insurance trhought the car rental agency. Many credit cards also provide many forms of travel insurance such as travel interruption and lost baggage coverage.
Of course, if you don’t pay your credit card balance in full each month, all of the savings benefits listed above will be more than wiped out by finance charges you’ll pay. And keep in mind that not all credit cards offer equal services and benefits. There are many differences between cards and you always need to read and understand the detailed terms and conditions to be sure the credit card you’re getting has the features you value most.
This post is part of the latest Carnival of Personal Finance at ABCs of Investing. Check out the other great carnival entries as well.