Last updated September 23rd, 2019.7 minute read
Financial independence is a central theme of this blog because it’s such a powerful concept. And guess what? Credit cards can help you get there.
Of course, I always have to qualify these statements by saying that credit cards are not without risk. I’d be remiss to recommend even more cards if you currently hold the average household credit card debt of $8,6836. Your focus in that case should obviously be paying down debt, perhaps employing your favorite debt repayment method.
Instead, these ideas are intended for those who generally have their spending control and have a history of responsible card use. This has always been me, but for quite a while, I only used my cards to help my credit score and earn a few bucks in rewards. Maybe 1% here, 1.5% there.
That alone is fine, but credit cards can do so much more. In fact, if you have you have your spending under control, I’m here to tell you that Dave Ramsey isn’t always right.
Sorry, Dave. We’re all wrong sometimes, you know?
For example, in the post I linked above, Dave claims that “no one ever got rich off a rewards program.” Now, technically, he’s exactly right. After all, my rewards won’t put food on the table, nor will they help grow my investments.
But what they can do is enable me to do something I probably would have done anyway: travel. Instead of paying thousands to travel abroad, though, I can get that down to a matter of hundreds. At most.
The fact is that if you aren’t in Dave’s target audience, taking his advice could mean missing out on the excellent benefits of credit cards.
I realize that not everyone is quite as eager to travel as I am. Still others may not even have the option due to family, their job, or any number of other factors. However, if you happen to have an interest in traveling and aren’t completely tied down, credit cards can help you save a ton on your trip.
A great real-world example of this is Andy of Marriage Kids and Money. Andy recently took a vacation with his family, and he estimated the cost of the trip was about $6,000. Yikes, that’s a lot of cash. But thanks to his rewards, Andy was able to visit beautiful Cabo San Lucas with his family for a cool $300.
Sound too good to be true? Well, it’s not!
It’s pretty simple, actually. See, the banks issuing cards are “banking” – literally – on people who sign up for cards and rack up a ton of debt. The result? Despite the fantastically valuable signup bonuses, they end up paying more in interest than the bonuses’ worth.
Honestly, it sounds a bit unethical when you think about it that way, but that is the reality of the situation.
The good news? If you only use your card to pay for things you would have paid for anyway, you could earn hundreds or even $1,000+ in rewards for little to no cost.
Therein lies the rub: are you prone to misusing credit cards and racking up debt? If so, hey, don’t worry. Nobody’s perfect. I’m not patronizing you, either. I have definitely made mistakes with my money. But if that’s the case, you may want to take Dave Ramsey’s advice. And yes, I absolutely mean that.
Doing it the right way
On the other hand, if you are a little more like me, I definitely recommend looking into credit card rewards. I recently earned my Chase Sapphire Reserve sign-up of 50,000 points. I’ve also managed to tack on an additional 10,000 points, and the resulting 60,000 points should be enough to get me a round trip to Europe! I’m pretty excited about that, needless to say.
Now that I’ve earned that, I am waiting on my application for the Chase Ink Business Preferred. If approved, I’ll be on track to earn a whopping 80,000 points for spending $5,000 in 3 months. Crazy.
By the way, in case you aren’t familiar with points, they have a 100:1 points-to-dollars ratio. In other words, 50,000 points are worth $500. You will sometimes see miles instead of points for cards that are more focused on travel, but the ratio is the same.
Minimum Spend “Hacks”
You might be wondering how one could possibly spend $5,000 in just 3 months. Especially someone who isn’t exactly a millionaire like myself. Well, as is to be expected whilst travel hacking, there are actually several tricks for doing this.
Pay your rent and/or car payment with Plastiq
These won’t work for everyone, as many FI-ers don’t have a car payment, and may also have a mortgage instead of paying rent. And as it turns out, mortgage payments via Plastiq are mostly dead. Paying rent is still a viable option though, as are car payments.
How does this all work? You simply pay Plastiq using your credit card, and Plastiq will then send a check to wherever it needs to go. Now, Plastiq does charge a 2.5% fee, so you’ll pay $25 on a $1,000 rent payment.
But let’s take this one step further.
If you are fortunate enough to have the Chase Ink Business Preferred, you actually earn 3x points on your card for using Plastiq. Translation: you actually come out ahead by 0.5%. How d’ya like them apples?
As if that isn’t all good enough, the icing on this oh-so-good rewards cake is that the 80,000-point Chase Ink Business Preferred sign-up bonus could be worth a lot more than $800.
Prepay utility bills
Yet again, YMMV with this, so you can always contact your utility company and ask if it’s an option. Personally, I was able to pre-pay my Internet bill to 6 months out.
Buy gift cards
With this one, I definitely wouldn’t recommend buying $5,000 worth of Amazon gift cards or anything like that. But buying a few hundred bucks worth of gift cards can be a nice trick to help you meet your minimum. Of course, you would only want to buy gift cards you know you will inevitably use. Focus on stores you know you visit regularly, whether or not you are in the process of travel hacking.
Giving your credit score a boost
Switching gears now, I will speak a little bit about how credit cards can actually help your credit score. I did mention this one earlier. And it’s probably more in the realm of common knowledge, but I still feel it is worth mentioning.
At a high level, here are the factors that can be worked to your advantage by using credit cards (properly):
- Payment history
- Length of credit history
- Credit utilization – how much of your credit limit you are currently using
- Total number of accounts
These should all be fairly self-explanatory. At a very basic level, the idea is:
- Open a card
- Keep that card open for a long period of time*
- Pay the card on time and in full each and every month.
*May not apply if you are card churning.
Indeed, this is very simple, but that is the general idea. Such behavior – especially over a period of years – would help boost your credit profile. The result could be a higher likelihood of being approved for a mortgage, and more importantly, a lower interest rate.
The bottom line
What is undeniably most important, though, is to make certain you are using your cards responsibly. Every benefit I detailed can easily be erased (and then some) by incurring sky-high credit card interest. Thus, I do recommend you tread lightly – particularly if credit cards have proven problematic for you.
If credit cards have not been much of an issue for you, but you have not been leveraging many of these ideas, I think they are worth considering.
Especially for me – travel is almost a must at this point. But spending the thousands of dollars in cash would push my FI pursuit months or even years back. That just isn’t a good deal, if you ask me. Which is why currently working on putting these strategies to good use.
Hopefully, by this time next year, I will be able to say I have already taken an international trip. Until then, I’ll be hard at work earning those points!