05 Jan Balancing Rewards with APR
Balancing Rewards with APR: Managing Credit Cards as Part of Your Budget
Credit cards can be a way to build credit and to smooth the bumps in your budget. Many cards offer points or rewards as incentives to use your credit card instead of cash, check or your debit card. For example, a gasoline card might offer a discount on the price of gas at the pump, or it might give points towards discounts on hotels or motels. This can be useful for people who must travel as part of their job. Some grocery and department stores offer store cards that can be used in a similar manner, and that provide a discount on items purchased.
Balancing Rewards with APR
There is a catch to this, of course. The catch is APR, which stands for annual percentage rate. If your store card offers a 10% discount on all purchases made with your card, but the APR is 15%, it doesn’t take a lot of fancy math to understand that you are losing, rather than gaining, when using your card. The key to getting some benefit from that 10% discount is the credit card grace period.
Understanding Grace Periods
The grace period, usually one month starting with the first day of the billing cycle, allows you to make interest-free purchases, providing you pay off the balance on your card by the due date. The grace period is an essential part of balancing rewards with APR. If you start with a zero balance each month, you will not pay any interest and that 10% discount – with which the store is rewarding you for shopping there – will lower your normal grocery or gas spending.
The catch is that if you leave any balance at all on your card, you do not get a grace period. All additional purchases, in the month when you are carrying a balance, accrue interest right along with the balance brought forward.
On the other hand, if you pay off the balance of your card each month, you do not pay interest and you receive your points, frequent flyer miles, discount rooms or whatever other benefits are available to you.
Managing Your Budget to Take Advantage of Your Rewards
Let’s suppose that you have a gasoline card and a grocery store card. These cards can be used to purchase consumable items. The gas card would cover gasoline, oil, and perhaps even repairs if it is the right kind of card. The grocery store or department store card might be used to purchase groceries, dry goods, pet food, and perhaps even some small appliances. To balance your rewards with APR, you will need to use some mental gymnastics.
Here are five simple steps that will allow you to get the most out of your credit cards:
2. Budget your spending for the same amount you would spend if you were using the cash in your account.
3. Use the cash you saved to pay off the credit card by or before the due date so that you start each month with a zero balance.
4. Never consider credit cards as “extra money.”
5. Always consider credit cards as borrowed money – because they are a line of credit, not cash.
By keeping these five considerations in mind, you will have little difficulty balancing rewards with APR.
Taking Your Rewards to the Next Level
Once you have mastered balancing your rewards with APR, you can think about how to apply those rewards to your overall budget. Their value will depend upon your activities.
For example, if you travel a lot, then a discount on hotel and motel bills will be a big plus, but if you rarely leave your hometown then it will be of less benefit. Discounts on items that you normally purchase, such as food or gasoline, are of major benefit, as are the cards that give back cash percentage on all purchases.
Making it Work for You
It is tempting to spend that extra cash that is freed up by discounts or rewards. Instead, add those little bonuses to your payment account for those rainy-day surprises when your regular income doesn’t quite pay for everything. That way you have something put aside to deal with the unexpected, and your ability to pay off your card each month, in a timely fashion, is increased.
Furthermore, if you allow your reward amounts to accumulate, you might be able to use those funds to fulfill your dreams – such as a new car, down payment on a house or a nest egg for your own business.
Putting it All Together
Balancing rewards with APR isn’t difficult. Remember that to take advantage of your credit cards grace period, you need to pay off your balance in full each month. Don’t consider your credit card as extra cash; consider it an opportunity to improve your credit rating.
When You Must Go Over
Should an emergency occur, if you have followed the good credit card user rule of 30/70 – that is using only thirty percent of your card’s credit each month, while keeping 70 percent clear, you will have that credit available to deal with the unexpected. Keep in mind that when you use your card for emergencies, then you are likely to have upset your rewards vs. APR balance. You will want to quickly repay the amount that has been charged to your card so that you can once again benefit from the rewards offered by your credit card.
The Bottom Line
The bottom line is that when you manage your credit card well, the rewards offered can be of value. However, if you continually carry a balance on your card, the APR is likely to overwhelm the value of the rewards.