Credit cards often get a bad rap. Just in the past couple of weeks, you've heard stories about people paying $200,000 in finance charges and getting trapped by gimmicks such as two-cycle billing. Many people dream of cutting up their plastic and never having to rely on credit cards again. Yet you may not hear nearly as much about the big benefits of using credit cards prudently. If you take advantage of your credit cards, without falling into the traps they pose for the unwary, you can end up well ahead of the game.
The key
There's just one catch. You have to pay off your balance every month. It's as simple as that.
Carrying a balance on your credit card is a sucker's game. There are a few situations in which you might find a 0% teaser rate or a special deal for a lower rate over an extended period, but for the most part, credit card finance charges are among the most expensive you can pay to borrow. It's best just to steer clear, and the best way to do that is never to carry a balance.
Make money two ways
If you follow the simple rule of always paying off your credit card bill, it's easy to make money. First, you'll get to take full advantage of the grace period that credit cards offer. You can buy $100 in groceries at the beginning of the month, get your bill at the end of the month, and have an extra few weeks before you have to pay the bill. That may not sound like much, but if you spend $2,000 a month, the interest you can earn on that money can add up to $100 or more annually.
Also, you can find credit cards that offer a variety of rewards to their cardholders. Whether you like free travel, shopping discounts, or cold hard cash, credit card rewards can put hundreds of dollars back in your pocket. For instance, Chase (NYSE: JPM ) offers points worth 1% in cash rebates, while US Bank's (NYSE: USB ) WorldPerks card and the American Express (NYSE: AXP ) Membership Miles program offer mileage credit toward free travel awards. All it takes is finding the card that's right for you. Resources like the Fool's Credit Center can help you do exactly that.
Know your limits
Of course, if you can't avoid carrying a balance, then credit cards probably aren't for you. Some people have a lot of trouble understanding that spending money with a credit card is exactly the same as spending cash or writing a check. If you're the sort who'll max out any credit you have, no card reward will be worth it.
But if you can commit to paying them off every month, credit cards are the best way to pay. Managed correctly, credit will pay you back for expenses you'd pay anyway.
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Fool contributor Dan Caplinger got his first cash-back bonus nearly 20 years ago, and he hasn't looked back since. He doesn't own shares of any of the companies mentioned in this article. The Fool's disclosure policy is your reward.
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