Conventional personal finance gurus like Dave Ramsey say things like
“Responsible use of a credit card does not exist…
That may be true for merely conventional people.
If you are a conventional person who spends way too much money each month and “can’t afford” to get your 401k match, then I want you to do four things:
- Slap yourself
- Stop reading now
- Figure out how to stop wasting so much money on crap you don’t need
- Set a reminder to come back here in a few months and read on.
For the folks that are left, I assume you can handle paying your credit card bills in full each month. Keep doing so.
I’m about to tell you how to make $1000 per year with almost zero effort.
Credit cards are awesome :
- credit cards gives you “float”
- credit cards reward you with cash back, frequent flyer miles, or gift cards
Float is a term you normally associate with buoyant objects that refuse to sink in a pool or bathtub. In the financial world of credit cards, float is a term that describes the period of time between charging a purchase and subsequently paying for a purchase.
For example, I may spend $100 at the grocery store on October 7th (the first day of my credit card’s billing cycle). The credit card company will send me the bill with that $100 purchase on November 6th, and my payment will be due on December 2nd. The elapsed time between October 7th when I make the $100 purchase and December 2nd when I ultimately transfer $100 to my credit card company is a period known as “float”. In this case, the period of float is 56 days, or almost 2 months.
You won’t get 2 months of float on every purchase, but on average you’ll get around 1.5 months of float on your purchases if your purchases are spread evenly throughout the month.
Float is like a free loan from the credit card company. And who said credit card companies weren’t nice?
A quick calculation says for every $1000 in monthly spending you have, you save about $9 per month by graciously allowing the credit card company to give you a free short term loan each month ( $1000 * 1.5 months average interest free period * 7% opportunity cost / 12 months ). Do this for a year and you have saved $105.
On top of that, getting 1% to 5% in cash back or rewards points for your everyday purchases is simple with a variety of credit cards in the market today. $1,000 monthly credit card spending at an average cash back rate of 2% yields another $240 per year in cash back or rewards points ($1,000 x 12 months x 2% = $240).
To recap for those that weren’t paying attention. If you spend $1,000 per month or $12,000 per year on a credit card, you can save $105 from the float, and make $240 from cash back or rewards points. That’s $345 per year of free money that credit companies are begging to give you! All you have to do is spend $1,000 per month on a credit card.
Who only spends $1000 per month on a credit card?
The median household income in the US is around $50,000 per year. Some of that income goes to savings, some pays rent or a mortgage or taxes, some repays debt. What is left is mostly spent on goods or services that could be charged on a credit card.
Many families spend $3,000 per month or more on chargeable expenses. Some purchases can obviously be charged like:
- groceries and household goods
- automotive expenses like gas and maintenance
- medical and dental
- clothing
- dining out
- entertainment
- electronics
Put down the checkbook or stacks of cash and don’t overlook many other expenses that you could be funneling onto a credit card and getting big bucks from float and cash back rewards:
- home repairs
- house insurance and taxes
- auto insurance, license, and registration
- utilities such as natural gas, electricity, water/sewer, trash, cable TV, internet, and cell phone
- daycare, after school care, or summer camp
- private school or college tuition
- vacation rentals like mountain cabins or beach houses
I am certain I have overlooked some expenses that are customarily paid with check or automated bank drafts. So next time you are about to pay a bill out of your checking account, take two minutes to check the service provider’s website to see if they accept credit card payments instead. You can rack up some easy cash back or rewards points with very little effort.
As always, make sure you aren’t paying an extra charge or “convenience fee” to use a credit card. My county charges around 2% to pay with a credit card for example, so I pay using ACH bank draft from my checking account.
If you can save $345 per year while spending $1,000 per month on a credit card, a more typical family that spends $3,000 per month will save over $1,000 per year. That $1,000 is free money just waiting for you. Don’t miss out! Charge everything you can on a credit card, but make sure you pay it off in full by the due date to avoid interest charges.
But Credit Cards Are Confusing and I Don’t Know Where to Start!
I have compiled some excellent credit card offers that will allow you to implement the strategies I have discussed in this article. You should always get at least 1% cash back or the equivalent in rewards points. Some cards will pay more than that on everything, but may restrict redemption options to travel or gift cards. Other cards will have 3% to 5% cash back on specific categories like groceries, gas, or a changing set of categories. I personally love the 5% cash back on groceries and gas I often get since I spend a lot on those two categories and I can’t cut those expenses much more.
When you are checking out these credit card offers, pay attention to bonus features that might appeal to you. Many cards give you $100 to $400 as a sign up bonus, and some offer enough frequent flyer miles or hotel points to give you a free round trip flight or two, or many nights in a hotel.
Be careful, as some cards have annual fees that could eat into your savings from cash back points. It can be worth it to pay an annual fee when the cash back or rewards program is really great. We have paid an annual fee for the American Express Starwood card that rewards you with hotel points, as the rewards program is excellent, and it didn’t take us long to earn free nights.
Don’t feel like you can only have one credit card. You might to apply for a good basic 1% to 1.5% cash back, a card to get bonuses for specific frequent flyer or hotel programs, and a card or two to get the larger 3-5% category based bonuses on gas, groceries, or other categories of spending. You can do multiple applications at the same time, but be careful if you plan on getting a car loan or mortgage/refinance soon, as a large number of new credit applications can adversely impact your credit score short term.
And if you find cards that have great sign up bonuses, remember you and your spouse can apply for separate card accounts so that you each get the sign up bonus (free vacation for 2 anyone? 🙂 ).
We have multiple cards and label them with tiny sticky notes covered in clear tape that reminds us what categories of shopping to use each card for. Groceries and gas might be on one, Amazon.com on another, and then “Everything Else” on our third card.
Best credit card offers right now:
Cash Back Cards
Travel Rewards Cards
For more details on credit cards I recommend, check out my complete credit cards recommendation page.
As with any financial transaction, review the terms and conditions carefully and make sure you understand what you are getting before submitting your applications.
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Love the idea of putting the sticky notes on each card to remind yourself what to use it for, based on the rewards each one gets. Definitely going to start using that!
It works for us! This quarter the variable reward Chase Freedom pays 5% on Amazon and department stores so I put that on the label and my Amex says “Everything Else”.
Although I do see the logic of using credit cards as you have clearly described here, and indeed I did follow this strategy for some time, I now think that for most people – even including the seriously frugal – it is much better to pay with a debit card out of a checking account, or better yet, with cash. Nothing sends a clearer message to the murky depths of our brains than seeing our hard-earned cash going out of our own hand into somebody else’s! In another post you mention how many of us end up with a lot of junk lying around the house. How much of that junk was paid for with a card and how much with cash?
I use one card with a groceries/cashback scheme for my groceries in that store(so I get more points), and for everything else, I have started paying out of my checking account or with cash. Yes, I lose a few cashback points that way, but I figure I will buy less useless things, and will avoid loading too much onto my card to pay back when the bill is due.
We are all human and the temptations sometimes overwhelm even the strongest frugalists among us….
I see your point. That’s why I threw out the precaution of “Figure out how to stop wasting so much money on crap you don’t need” at the very beginning of this article.
I would say if you buy too much unneeded crap that fills your house, you have a problem identifying what you need to buy. The core of the problem doesn’t lie in method of payment (cash vs credit) but rather in inability to carefully select those items you want to make permanent fixtures in your house, and putting everything else back on the shelf.
Maybe I’m being too demanding of consumers at large? I’m aiming at helping others identify the actual problem (buying too much unnecessary crap that is actually a detriment to their quality of life instead of a benefit to their QoL).
To recap (for the benefit of everyone), if you have a problem spending too much money on crap you don’t need that fills your house and makes it ugly, solve that problem first. Then come back here, and start saving hundreds or thousands each year using credit cards to buy stuff you already need to buy.
I hope the incentive of hundreds or thousands of free dollars entices people to get their overconsumption issues in check so they can take advantage of the free money on offer from credit card rewards.
In looking at our purchases of “stuff”, it amounts to $20 per month. It is mostly replacing things that are broken or furnishing rooms in the house as our kids grow up and need different things (clothes hangers, lamps, bigger beds for example). Other than that Buddha statue Mrs. RootofGood had to have ( 😉 ), I can’t really point to a piece of “stuff” we bought that doesn’t have a strong purpose.
We put every single possible dollar we can on our credit cards and reap thousands of dollars in travel rewards because of it!
I’ve stockpiled over 350,000 miles/points over the past 2 years and it’s just free money! I have an article on my site showing how we’re taking our family to Disney World for free and also explaining credit card rewards in general. It’s such an interesting topic to me and I’ve tried to learn as much as I could over these past few years.
I know some people get in serious trouble with their credit cards, so this unfortunately isn’t for everyone. But as long as you pay off your full balance every month, you’re silly not to do this!
It’s really amazing to see how quickly those points can add up. Sign up for a couple cards in your name and in your wife’s name, and boom you have a few hundred thousand air miles or hotel points. And then you earn them spending money you were already spending!
Unless you can’t handle repaying the credit card bill in full each month, you are seriously losing out big time ($1000+) each year you don’t get the right credit cards. And that is $1000 before any sign up bonuses! Those can be worth $500+ per card by themselves.
I completely agree with you Justin. By charging everything on my 1.5% cash back credit card, I essentially reduce the purchase price by 1.61% (the cash back + the 1.5 months of extra interest that I earn while the cash stays in my high interest checking account earning 0.87% annually). It’s free money with zero risk.
It’s crazy to think how much free money people miss out on due to choosing a debit card or cash for spending. Although some claim you spend way more if you use credit cards instead of cash. I’m still a believer in the “free money with zero risk”!
Can you explain “Float”? Reading “7% opportunity cost” are you saying you’d be earning 7% on the cash while it’s not being used for that month and a half? Maybe I’m reading wrong but I’ll say that whenever I read something like “all you have to do is save $100 a month and with 12% interest you’ll have X after Y!” I immediately tune out since the interest rate is unreasonable. If you’re citing a 7% return I’m very skeptical. 🙂
Float is the money that you’ve spent but don’t have to pay for a month and a half on average. You can treat the float like a permanent free loan from the CC company for whatever your monthly charged expenses are. Can you get 7% in a savings account? No, probably 1-2% maximum today. But you could invest the $1000 long term since you’ll always have that float from the CC company. Long term returns of 7% are reasonable I think!
So conceptually once you start floating $1000 a month onto a credit card do you immediately have $1000 more in your checking account that you wouldn’t have if you paid cash? I guess that makes sense. Then you move that extra $1000 float into a brokerage account and invest in some index funds?
That’s the idea. You basically get a perpetual $1000 loan from the credit card company.
Sorry to rez an old post, but this seems like the right place to ask. At the end of this article @JustinRoG suggests having a spouse sign up too. I’ve just started playing this game of getting multiple cards and getting these cash back bonuses. (Annoyed that I missed doing this for years, but I’m learning now). I tried to sign up my wife but she was insta-rejected. I’m guessing because I put Occupation=homemaker and income=0. How does one work around this with a non-working (outside the home –trust me, she works) spouse?
I’ve always treated our household income as “our” income and used those stats. That’s how we look to the IRS so I figure it’s good enough for the credit card company. And our joint checking account is what I use to pay the credit card bills 🙂
Here I thought I was the only one that thought charging everything was a good idea – as long as you can pay it off every month OR at the end of a 0% teaser interest rate period.
A couple of years prior to retirement back when I had read somewhere (MMM perhaps?) I needed 25X expenses to be financially “safe” in retirement but had no idea where a lot of our “discretional funds” were going every month, I decided we should charge EVERYTHING so I could get a better handle on our cash outflow. After a few months of such tracking, I was comforted to discover, yes, we should be ok once I retired.
It does take discipline to not spend frivolously just because you are using a credit card, and to pay off the entire balance every month. So know yourself and your spending habits before implementing the “charge everything” strategy!
I really enjoy the expense tracking part of credit card usage. We know exactly where all of our money is going since we rarely use cash for anything these days.