With over 1,700 credit cards offers available in the U.S., there's an endless array of offerings suited to a variety of credit card needs, from credit card sign-up bonuses to balance-transfer credit cards to help cardholders pay off debt faster.
In the following video segment, Motley Fool analysts Michael Douglass and Nathan Hamilton talk about one valuable credit card perk and when taking advantage of it makes sense.
Michael Douglass: Nathan, we were talking earlier about a survey done by CreditCards.com for folks who are thinking about getting a credit card, and it said that 40% of applicants open an account to get rewards. Of course, the crazy thing to me is, oh, OK, so that means 60% of people looking for credit cards are just missing out on this?
Nathan Hamilton: Yup. Yeah, so you've got to look at it. There are numerous reasons why people would open a credit card. Maybe the other 60% are using balance-transfer strategies to pay down debt quicker, which typically don't come with rewards, and for what we believe shouldn't be the primary focus if you are paying down debt, but for the majority of other cardholders, for a lot of people that are applying for credit cards, it does make sense to look at the rewards and spend some time reviewing what the earnings rates are.
Backing it up to, say, the top three items in your budget and saying, OK, do these rewards align with where I'm spending my money? Where can I get the most juice for the squeeze, essentially?
Douglass: Yeah. If you have a gas rewards card and you take the Metro every day, that's not going to be very useful, right?
Douglass: If you have a restaurant card and you eat out a lot, well, then, OK, that's where you get that opportunity to get ... as we've talked in the past, we've called it earning a dividend basically on your spending, right?
Douglass: It's a one- or even two- or in some cases even more percent dividend on your spending.
Hamilton: Yeah. Put into context, essentially what's important to understand as well is when earning rewards you harvest all of that yield of course when you're paying your balance off each month. It's a credit card essential to know, for anyone that doesn't, is when you're carrying a balance from month to month you start incurring interest charges, but you have a temporary interest-free loan when you make the purchase in between when the interest is charged. In those scenarios, credit cards obviously make sense, and that's why there is such a draw. I guess 40% of people looking for cash rewards.
Douglass: Sure, it totally makes sense. Well, cool. The key thing, I think, for everyone when thinking about opening a card or transferring or something like that is to just set spending limits to make sure that you're spending wisely and that you're not incurring those interest charges. If you're paying an 18% interest rate to get a 2% cash-back bonus, that's obviously not a good trade.
Hamilton: Yeah, you're 16% off to the bank. One way that I found very useful to manage my credit card spending is I break up the month into thirds, so 10th, 20th, and end of the month. What I do is I set a limit on my credit card, just a notice or email, text notification that says OK, you've hit your limit so I know, OK, if I hit that limit on the 8th, I'm overspending a little bit. Need to cut back for a few days and then reset it every 10 days or so. It's just an easy way to manage your credit card spending and back it up to what you actually have for cash in the bank.
Douglass: Sure, absolutely. Well, cool. Check us out at Fool.com/creditcards for our picks of the best cash-back credit cards, and we have a free guide, "5 Tips to Increase Your Credit Score Over 800." Thanks, Nathan.
Hamilton: Thank you.