Credit cards can carry a lot of horsepower for cardholders who are looking to pay down debt faster with balance-transfer strategies or earning cash back and travel rewards on everyday purchases, all while avoiding costly interest charges.
With that in mind, Motley Fool credit card expert Nathan Hamilton and Deputy Managing Editor Michael Douglass discuss two purchases that cardholders should consider placing on credit cards.
Michael Douglass: So, Nathan, let's talk about three things you should pay for, generally speaking, with credit cards. These are the sorts of things where you're getting a little bit of extra benefit by putting them on your card. I guess before we talk about anything else, the first caveat is generally speaking, you should be paying off your credit card every month.
Nathan Hamilton: It's such a smart thing so you don't get hit with high interest charges.
Michael Douglass: And so if you can't do that, maybe you shouldn't be putting things on your credit card and/or buying them. That's like the big, first thing we, to be responsible, need to say. So all these things are contingent on the idea that you've got a budget and you are keeping to it.
Nathan Hamilton: Yeah, and why it makes sense financially, as well, outside of budgeting is if you have a rewards card (and say you're earning 2% cash back, but you're racking up debt and being charged 20% interest), that 18% difference is going out of your pocket to someone else's. So really, for the most part, there's no sense in earning rewards at low single-digit rates to get charged interest at high double-digit rates.
Michael Douglass: Right. It's just a losing proposition.
Nathan Hamilton: It is.
Michael Douglass: So let's start with travel accommodations and airfare.
Nathan Hamilton: To me, it seems pretty much like a no-brainer when it comes down to it, because for the most part, when you're making travel plans, you've generally got the money to back it up and go on that trip anyways, so you might as well put it on credit cards that earn some sort of rewards. There are some cards out there that earn 3x points for each dollar spent. A lot will earn one or two points, as well. So it is something you might as well take advantage of if you're going to be paying for it with cash anyways.
Michael Douglass: Right.
Nathan Hamilton: And there are some credit card benefits you also get from, say, the fee side of it. Some cards will pay for baggage fees. Some cards will provide you additional cancellation protection. So there are those benefits beyond the financial sort of things that initially hit you with a credit card that does make sense for travel. Airfare, accommodations, hotels. Train rides, even in some cases, on credit.
Michael Douglass: Another good expense to put on your credit card [is] car rentals.
Nathan Hamilton: Yes. When it comes down to it -- we'll get a little bit into the details of car rentals -- there are times where it makes sense to put that expense on credit because there are essentially two types of insurance that you can get. There's primary and secondary insurance. Many credit cards will cover secondary insurance, which has the lower coverage. It may pay for like dings, or paint.
Michael Douglass: Small stuff.
Nathan Hamilton: Yes, small stuff. But premier credit cards may offer primary car insurance -- God forbid it ever happens -- if your rental car is stolen. There is coverage on your primary insurance where it really gives you those premier benefits.
Michael Douglass: Absolutely. That's a pretty clear benefit right there. I have never had a rental car stolen, but that is something I'm kind of afraid of every time I get behind the wheel. Is this going to be the time?
Nathan Hamilton: If your car rental gets stolen while on vacation...
Michael Douglass: That's brutal.
Nathan Hamilton: That's a brutal one.
Michael Douglass: And the one thing you don't want to do is then have to pay for it. Let's also talk about recurring necessities. These are things like your phone bill, your cable bill, [and] basically whatever else recurring and consistent that you can put on them.
Nathan Hamilton: Gas, groceries, cable bills, telecom bills, cellphones, and so forth. Assuming you have the capacity to pay those bills monthly (to pay them in cash as you normally would), you might as well earn cash back on them, and it seems like a no-brainer for many people. It's just a matter of [being] smart with covering those expenses, and making sure you're meeting your budget. You might as well earn 2% cash back. You might as well earn some travel miles and it makes sense to do so. And with credit cards, you can put them on auto pay to insure that you're paying the bill and even put your credit card bill on auto pay to insure you're covering the bill when it comes due.
Michael Douglass: Absolutely, and that's a great way to do it. The important thing here, as with really anything financially related, is don't spend more than you have, generally speaking. And fortunately we've got a lot of other really good content about credit cards. About credit scores. About budgeting. About really all these kind of elements of personal finance. So check us out at fool.com/credit cards where we've got a lot of information, some free guides, and even The Motley Fool's picks for the best credit cards of 2017. So check us out.