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Credit Card Cash Back: Getting Paid For Using Credit

Having a great credit score, paying no credit card interest each month, and getting paid by the credit card companies all at the same time sounds too good to be true.  The truth is, it’s pretty much automatic if you’re disciplined.

One of the most effective ways to build or raise your credit worthiness is to show that you have the ability to use credit responsibly.  One of the major factors credit reporting agencies consider when determining credit scores is something called credit utilization.  All of your available credit card credit, summed up, against the total amount of credit that you are actually using is your credit utilization (for credit cards).  Your credit utilization will either improve or decline each time you make a purchase or payment with your cards, so it is variable and changes over time.  If you want a good credit score, you need to understand that you will be penalized if you go over about a 20-25% utilization of your available credit.

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For example, assume you have two credit cards each with a $5,000 limit.  You have $10,000 of total available credit.  If you have a balance of $3,500 on one and $1,700 on the other, then you are using $5,200 of your available credit.  You have 52% of the credit available to you in use, which will significantly lower your credit score compared to what your score would be if you were carrying a $1,500 balance on each card.

One other major benefit to keeping your balances low is that you pay much less in interest cost.  If your card has a 20% interest rate on it, which many do these days, you can pay thousands of dollars in interest by keeping a high balance on your credit cards each month.  Keeping your balances as low as possible, or even better, not carrying a monthly balance, will save you money on interest cost and will also give your credit score the maximum benefit.  That will potentially let you save a lot of additional money on interest rates for large loans, such as cars or a mortgage. A more aggressive credit card strategy allows you to actually make money by using your credit cards and pay no interest at all.  You have to be disciplined, and you have to be willing to live within your means.  Really, you need to act as if you don’t have any credit at all, and only buy things with your credit that you will be able to pay in full before the bill is due.  Use cash back cards which will return between 1% and 5% to you on various items and pay all your bills with it.  Pay your electricity, cell phone, cable and other monthly recurring bills with your credit card and pay the full balance before it is due.  If you use your cards wisely, you can actually make $50 bucks a month or more in cash back with no cost or fees at all just for responsibly using your credit.  To get started down the road to having your credit card cash back:

    • Start paying off your credit card balances to zero now
    • ONLY AFTER you have zeroed out your credit card debt, begin charging all possible monthly expenses on the credit cards that offer the most cash back
    • Pay off your bill in full before it comes due – splitting up your payment in half and making two separate payments each billing cycle is a great way to get this done
    • Have negative or inaccurate information removed from your credit reports – you can either hire a professional credit repair firm or do it yourself – just remember that when it comes to your ability to borrow money procrastination is costly