Using Your Credit Card--To Save Money

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A few simple steps will help you get the max out of your credit cards.

Advising someone to use a credit card as part of a sound financial plan sounds like telling someone to eat ice cream as part of a weight loss plan. The truth, however, is that credit cards can be used to your advantage.

The best way is to use them as a temporary replacement for the cash sitting in your bank account, rather than for cash you don't have. In other words, it isn't about carrying debt, but about carrying a credit card that's going to pay you back for you using it, and taking advantage of an interest-free loan between the time the purchase and paying the credit card bill.

What about those of us who carry a balance some (or all!) of the time? You still want to maximize your return. The card's interest rate is your biggest concern, but these tips will help you recoup some of that interest payment, or keep you from needlessly paying more.

Never pay before the due date

Most, if not all, major credit cards come with the option to set up automatic payments every month. Unless you tend to have erratic and low balances in your checking account, take advantage of this option. And when you do, set the payment date as the latest one allowed without incurring late fee. The reason: a credit card gives you an interest-free loan during the period between the purchase and your next billing cycle.

For instance, if you buy something May 1 and your monthly billing cycle ends May 15, with a payment due date of June 1, the credit card has loaned you interest-free money for 30 days). To maximize the savings, keep your cash in a high-interest savings or checking account.

One word of warning: it's always better to pay early if you fear you'll spend the money before the due date. The money you'll earn in interest is microscopic compared to the fees charged for late payments.

Take full advantage of cash-back rewards

Many credit cards offer cash-back rewards, typically equal to one percent of your annual spending. Others sweeten the deal by paying back a higher percentage on purchases for things like groceries, gas, or from specific vendors. Sites like billshrink.com help you figure out which card is likely to pay out the most, based on your spending habits. For instance, at one time the Chase Freedom Card paid 5% percent cash back on purchases from a rotating selection of merchants (check for current offers; they change quickly). They also paid a $100 bonus for spending $500 on the card within the first three months.

Avoid balance transfer fees

We've all seen the offers--"0% Interest on Balance Transfers for 12 Months!" And, yes, it's typically too good to be true. That's because many of those cards also charge an up-front fee (often 3 percent) based on the size of the transfer. So transfer $10,000 to the card and you'll pay $300 for the privilege. If you pay the balance off in a year, that $300 fee is the equivalent to more than 5% annual interest. And if you don't pay off the balance, forget about it--the hike in interest rates after the promotional period will likely wipe out the savings in no time.

Shop through credit card sites

Many card companies have negotiated special discounts with retailers, particularly those who sell online. When shopping, check your credit card site first. The American Express Blue card, for instance, offered savings on everything from car rentals to flowers to meals.

Don't pay a fee (usually)
Contrary to evidence from recent history, banks are smart. If they don't charge a fee, they've determined that they're better off giving you a card and earning money from interest you'll pay over the life of the account. Fee-based cards still want to earn money from your interest payments, but they also think you might find their "special" benefits worth ponying up an additional $50 or $75 a year. Unless you're a particularly big spender, the no-fee cards typically will end up costing you less (the aforementioned American Express Blue has a fee-based option, which pays higher percentages of cash back--only worthwhile if you rack up big charges). If you're uncertain, compare the fee and no-fee options and see how your spending habits affect your benefits.

Matthew Malone writes for the leading Roth IRA and online retirement planning resource, RothIRA.com. He is a CBS SmartPlanet contributing writer whose work has appeared in The New York Times, Cosmopolitan, Smartmoney.com, Fortune.com, Forbes.com, and other publications.