Credit cards are a great way for the average person to have access to lines of credit. There are those who are very anti-debt or anti-credit card and while I cannot completely disagree with their sentiment because debt can cause a lot of damage when not controlled. Credit cards can also serve a very useful purpose when used wisely.

Key Points

• Take advantage of rewards that credit cards can give for purchases you make as part of your daily life. These can often add up to hundreds of dollars on a yearly basis.

• Choose cards with no annual fee and look for rewards that are consistent with your typical monthly purchases.

• Revolving credit is to be avoided at all costs. Pay your balance in full, each month. 

Starting out

First off, don’t use credit cards to fund a lifestyle you can’t afford. Living well within your means will pay off greatly. Second, if you are making purchases just to get rewards or otherwise spending more than you would normally, it defeats the purpose.

If you are new to the credit card game or have limited to no credit history, you may not have access to many of the credit cards that are out there. That's ok, you’ll be able to find something that you qualify for. If you’re starting out, don’t worry about finding the perfect credit card with amazing rewards. Over time, as you build up your credit history and maintain a good credit history you’ll be able to upgrade to better cards.

Where to look:

• Your bank. If you have a checking or savings they will likely be able to set you up with a credit card. It's also nice to have the accounts in one place.

• The mail. Very common junk mail. Sometimes you may find a worthwhile offer.

• Online search (obviously) see how others have rated various credit cards.

What to look for:

• Interest rate. Credit cards are not known for having low rates, but make sure it’s at least competitive with other similar offers.

• No annual fee. There is usually no good reason to pay extra, unless the rewards you get more than pay for the annual fee.

• Rewards. Why not earn points when buying things you purchase normally? More on this below.

Best use of credit cards

Some may think credit cards are best used to get access to money to buy whatever they want. It’s my opinion that you should think of your credit cards more or less as debit cards. That means any purchases you make during the month get fully paid off at the end of the cycle. The benefits are that you don’t get stuck with any nasty interest charges and helps to confirm you are likely living within your means (congrats, this will serve you well in life)

Rewards

For those uninitiated in the world of credit cards and their rewards, here are some general takeaways:

• Typically you earn rewards on each purchase you make. 1% or more is common. So for every $100 you spend you would earn at least $1 in rewards.

• There are usually minimum amounts of rewards you need to accumulate before you can use them. $20 - $30 is common.

• Cards typically offer rewards in the form of points, cash back or miles/hotels.

In my humble opinion, cash back rewards or points converted to a cash equivalent tend to be the best. This usually comes in the form of a deposit into your checking/savings account or a reduction to your credit card bill. The reason I prefer cashback is that I feel it is the most useful and flexible reward offered. Some cards may offer discounted gift cards or reduction in airfare costs, but gift cards are for very specific stores and likely to be used for something you were not planning to buy anyway. Mileage rewards are nice if you travel frequently by plane, but again, you are forced to use the rewards for one very specific use. Unless you have a great reason to use another type of reward, cash back is the way to go.

For example, I have 3 main credit cards that provide me different rewards for different types of purchases. 

1. Amazon Prime Credit Card that gets me 5% rewards on Amazon and Whole Foods purchases. 2% on restaurants, gas stations and drugstores. 1% on everything else.

2. Chase Freedom Credit Card that gets me 5% rewards on rotating quarterly categories like gas stations or certain stores. 1% on everything else.

3. Patelco Rewards Credit Card that gets me 2% rewards on gas and grocery purchases. 1% on everything else. This is a local credit union and may not be available in your area, but you may have a local credit union with attractive deals.

Does this mean you need several credit cards? Of course not. Do what makes sense to you. While I get 2% rewards or more on many of my purchases, I need to keep track of what cards get used for what (I have actually written notes in permanent marker directly on the cards to remind me). Over time you may receive credit card offers that provide better rewards than what you currently have. In which case, if you think the better rewards are worth it, you can simply stop using an older less desirable card. Pick a card that gives rewards for items you already purchase regularly. For me, extra rewards for gas and groceries are great because I know I buy them every month. Also, don’t forget to link other recurring expenses (phone bills, utilities, insurance etc.). Even if you only get a 1% reward, it’s better than nothing. 

Other benefits of credit cards

I also want to briefly touch on some other lesser known secondary benefits that credit cards can provide. They tend to be payment or travel related protections. This can vary widely based on the card, but they are worth being aware of.

• Liability protection from unauthorized purchases. Meaning you won’t be responsible for purchases you did not make.

• Lost luggage reimbursement. Get reimbursed if your airline loses your luggage. 

• Auto rental collision damage waiver. You can decline the rental companies waiver

• Trip cancellation insurance if your trip gets canceled by certain conditions like extreme weather or sickness.

Final Thoughts

You're not likely to get rich off credit card rewards, but it’s arguably free money that you might as well as take advantage of. In general, avoid annual fees, but if you find an attractive credit card with an annual fee, crunch some numbers to make sure that your rewards will more than pay for themselves. Use them and pay them off fully every month (remember we don’t want to get caught with revolving credit card debt). Once you reach the minimum amount of rewards, I recommend you put them to use as soon as possible. Cash them out to your checking/savings account or reduce a credit card bill. It’s not the end of the world to let the rewards accumulate for a bit, but a dollar today is worth more to you than a dollar a year from now.