I want to preface this post the same way I do the rest of my credit posts: I am not an advocate for using credit and I strongly discourage it. However, I do believe that everyone should be educated on the topic. That being said, let’s talk about the pros and cons of the different credit card options available.
What is a CashBack Credit Card?
Last week we discussed a method of using CachBack Credit Cards to generate a passive stream of income. As mentioned in that post, using this type of credit card will give you cash back each time you make a purchase with it. Typically, you will receive 1-1.5% on everyday purchases with this type of credit card. Some also offer higher rates on specific types of purchases such as gas or groceries. You may receive 3% cash back when you buy gas and 1% back on everything else. There are tons of CashBack Credit Cards to choose from so explore your options before you pick one. Check out BankRate.com and compare different Cards.
What is a Rewards Credit Card?
With a Rewards Credit Card, you receive points each time you make a purchase. These points can be used towards anything from flights to gift cards. In my opinion, you get more in return when you use a Rewards Card as opposed to a CashBack Card. Lenders also run promotions that offer incentives for spending more money in a set time frame. For instance, a lender may offer 50,000 points if you spend $4,000 in the first 3 months that you have your card. There are plenty of options to choose from. If you’re a traveler, find a Travel Rewards Card and you can put your points towards sky mileage. If you want to use your points to buy birthday presents, you can find a card to help you with that! There are plenty of options available.
Which is Better for Me?
If you struggle with making payments on time or carry a balance on your card from month to month, NEITHER IS A GOOD OPTION. But if you have the means and discipline to pay your card down to zero each month, a credit card can be very beneficial. A person that is well-established financially should go with the Rewards Card. That means that you have no debt and you have an emergency fund, retirement, and other investments. Rewards points will enable you to take free trips or eat free dinners among other things.
However, if you are still working to pay off your debt or build an emergency fund, use a CashBack Card. For one, you can put that extra cash towards your debt or emergency fund rather than just blowing it. Two, while using a Rewards Card may earn you things like free flights, you will still have to spend money during the vacation, which will delay the paying off of your debt or building of an emergency fund. Many of the Rewards Card incentives may encourage you to spend more money than usual.
Remember that if you struggle to pay off your credit cards in full, DO NOT GET ONE. But if you are able to pay your balance down to zero each month, credit cards can benefit you greatly. If you’re well-established financially, explore some of the Rewards Credit Cards. But if you are still working to be become well-established, explore the CashBack options and put the cash you earn back to good use.