FOOL ON THE HILL
The Power of Plastic?

Like most anything, a credit card is a tool that can work to your advantage when used properly. If you pay off your balance every month, there are ways to receive free money, airline miles, gasoline, and much more when you use the plastic.

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By Rex Moore (TMF Orangeblood)
January 24, 2002

You'll find a lot of advice about credit cards on Fool.com. We have an entire section devoted to the topic, called Getting Out of Debt, and one of the most active discussion boards in Fooldom is Consumer Credit/Credit Cards, which now has over 107 thousand posts. I consider our credit card offerings to be among the most valuable resources on this website.

A lot of that information deals with the best ways to get out of debt, and how to find the best deals on credit cards. Some of our articles have highlighted the true cost of charging more than you can repay (see "Putting a Price on Priceless"). There are, of course, many ways using the plastic can actually help you, and that's what we'll focus on here.

First of all...
There are two very important conditions that must be met in order to maximize the benefits discussed in this column. The first is the most important: You must be able to pay the full balance each month on your credit card statement. If not, you could find yourself slipping into a spiral of debt that can take years (and thousands of wasted dollars) to escape.

The second condition is for you to charge as many of your normal expenses as you possibly can on your card. Groceries, gasoline, auto repair and maintenance, clothing, household items... anything you can. Can you put your monthly rent on your card? Then do it. Deciding between two tree specialists to trim back your 100-year-old oak? Go with the one that accepts plastic. (Just don't spend more than you would have if you had never owned a credit card.)

Okay, assuming those two conditions are met, here are the payoffs:

Interest-free loans
Think about it... you won't actually be paying for any of your purchases until you write your monthly check. If you're able to keep your money tucked into an interest-bearing savings account long after you've purchased tires for the car, you will, in effect, be getting "cash back" for your purchases. Not enough to fund that cruise to the islands, maybe, but every little bit helps.

Credit card rewards
There are many companies out there that offer some sort of "reward" system for using their credit cards. The best reward, of course, is pure cash. Most of the cash reward cards work on a tiered system, with the rebate percentage tied to the amount you charge. Some put a yearly cap on the amount you can earn back, some don't. So, if you run $20,000 a year through a card that offers a flat 1% rebate, you'll receive $200 in cash back.

Cash is only one type of reward, however. Some cards offer free airline miles for each dollar you charge. Our own Tony Miller, TMF 2Aruba, has earned free round trip tickets to Aruba for years. Roy Lewis (TMF Taxes) was able to purchase a car with his credit card, and earned a free airline ticket in the process. (Their stories, and others, are in our Tips From Fools section.)

But wait, there's more. Five percent of all charges on General Motors' (NYSE: GM) "GM Card" can be applied toward the purchase or lease of certain GM vehicles. Several energy companies, such as Shell (NYSE: RD), Gulf, and Exxon Mobil (NYSE: XOM), offer rebates that can be used toward gasoline purchases. Other reward cards offer points that can be redeemed for electronics, clothing, dining, groceries, toys, and more. If you're interested in any of this, the best place to start is the rewards section of CardRatings.com.

Protection
Credit cards carry "chargeback" rights that offer a degree of protection for the consumer not afforded by other means of payment. If you purchase an item that was misrepresented by the merchant or turns out to be faulty, you can challenge the transaction and have the charge removed from your bill. Certain conditions must be met, but in general chargeback rights is a wonderful thing to have on your side.

For instance, let's say you just paid $200 to your local mechanic for a new radiator. When you get home, you notice the radiator isn't new after all, just repainted. If the mechanic only laughs at you and hangs up when you call to complain, you can begin chargeback procedures to get the charge dropped from your bill, if you paid by credit card.

Convenience and budgeting
If you follow this advice and charge all of your normal expenses, while at the same time paying off the bill each month, you'll find some other benefits besides the cash you save on the interest-free "loans" and the cash or rewards you're able to earn back. You'll save on checks, since you only need to write one each month. Also, each bill you receive will show you where every dollar of your money went, which is great for budgeting purposes.

Summary
As you can see, there are plenty of ways to make credit cards work for you. You'll have to do a little research, however, as you hunt for the best card for your spending habits. Since you'll be paying your entire balance each month (and you will, or we'll sick the Powerpuff Girls on you) be sure you look for a proper grace period, as explained here. And be on your toes for the little tricks some unscrupulous lenders may employ, like eliminating the grace period without telling you.

Rex Moore is in the market for a good 8" Newtonian reflector telescope, and will likely charge it when he finds one. He owns no companies mentioned in this column. The Fool has the best disclosure policy this side of the Andromeda Galaxy (M31).