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How I earn credit card rewards responsibly

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The topic of maximizing credit-card rewards seems to be a popular one lately, especially in the world of personal finance blogging.

Many of us use our credit cards to pay our bills and monthly expenses. We earn cash back and rake in the rewards. Some of us have even mastered the envious ability to churn credit-card rewards to pay for awesome vacations.

Because personal finance readers are so financially savvy, we usually take for granted that, for many people, this is a dangerous habit. After all, the average US household credit card debt is upwards of $15,000.

If you do it right, earning credit card rewards is a great money hack. Last year, for example, I earned $450 in cash-back. But you should have control of your finances before trying any kind of hack like this.

Let’s say you have control of your financial situation and you’re ready to play this credit-card-rewards game. How do you play properly? And what precautions should you take?

Here’s what’s worked for me.

Budget meticulously

I use a zero-sum budget, which is ideal when you use a credit card for monthly expenses.

Spending less than you earn is important anyway, but I think it’s crucial when you’re credit card churning. When I decided to start using a credit card, I made sure to calculate my budget meticulously.

I double- and triple-checked that the grand total of my expenses was less than my monthly income. I also considered my quarterly and bi-annual expenses.

Once you’ve established a thorough budget, monitor it. And whatever medium you use to budget, include your credit card account in it. I use Mint, and my card is linked to my account.

I make sure to spend within the limits of my budget so that I don’t have to worry about overspending on the card. But, just to be safe, I also monitor my budget. I subtract my credit card debt from the amount in my checking account.

I make sure this amount is enough to cover the rest of my monthly expenses.

When I first started playing with credit cards, I didn’t budget properly. I didn’t use Mint, and I’d check my checking and credit accounts separately. Basically, I would just do the math in my head, which is a bad budgeting habit, according to fuzzy-trace theory. So, of course, I would spend more than I meant to spend. I’d bust my budget.

It’s pretty simple. You should monitor your budget the same way you would with a debit card, to make sure you don’t overdraft. But you have to be even more careful with credit cards, because there’s no overdraft protection. And worse, if you don’t make your payment, you’re officially in debt.

Pay your card regularly

In order to keep up with my spending, I pay off my credit card every two weeks. This is also a good way to avoid incurring a late fee or interest, which would cancel out the rewards.

I used to pay off my card on the due date, and that’s definitely an option if you don’t want to worry about making a payment every other week. Paying it more frequently is just an added precaution. Plus, it helps me keep my budget organized.

Don’t spend to your limit

This is pretty self-explanatory. Obviously, you shouldn’t budget according to your credit-card limit. If you’re tempted to do this, then you probably shouldn’t be playing the credit-card-rewards game in the first place.

But, for the sake of being thorough, I’ll put it out there: Don’t spend based on your credit-card limit. And avoid raising your limit, too.

If you’re planning for a big expense, you might consider making an exception so that you can earn rewards for said expense. But if you think you might equate a raised limit with more spending, just don’t do it.

Pick a good card

When you’re tempted by an enticing offer, do your research. Read the terms and conditions. Read reviews. Here are a few things to consider when choosing a card:

  • Is there an annual fee?
  • What’s the cash-back incentive? How does it compare with other programs?
  • If you’re planning to use the card internationally, are there foreign transaction fees?
  • What’s the interest rate?
  • Is there a minimum finance charge?

Ideally, the last two shouldn’t matter, but it’s still good to know.

Have an emergency fund first

Because there is risk with using a credit card, it’s really important to make sure you have an emergency fund first.

Common sense, but worth addressing.

It’s bad enough to overbudget and not have an emergency fund — you have overdraft fees and returned check fees. But when you overbudget with a credit card, there’s the added nightmare of interest and late fees.

You shouldn’t play with credit card rewards if…

  • You have a shopping problem. A credit card is way too tempting for shopaholics.
  • You’re in consumer debt. I wasn’t in massive debt, but I used to have $1,000 worth of credit-card debt. I paid that off before I even started thinking about using my card for expenses.
  • You’re living paycheck to paycheck.
  • You have bad credit. According to Girls Just Wanna have Funds you should have excellent credit if you’re going to churn cards. “A credit score of 720 or higher on a scale of 850 is considered excellent, and you should have at least a few years of good credit history.”
  • You’re considering applying for a mortgage or loan within the next year. “Applying for a credit card will lower your score modestly — about 5 points for each application,” Girls writes. “But if you are about to get a mortgage or other big loan and are borderline on being qualified, they may frown upon opening too many card accounts just prior to applying for the loan.”
  • You’re incredibly disorganized and forgetful: There’s the risk of paying your card late and incurring interest. If you’re so forgetful that even reminders sometimes don’t help, I’d probably stay away from credit-card churning.

Rewards are great, but, again, they’re more of a money hack. And having control of your finances is way more important than any hack.

I should also mention that, because lots of people do have trouble managing their finances, many financial counselors advise against playing the credit-card game. Yes, there’s definitely a disconnect because the topic of credit card rewards is hugely popular in the personal finance blogosphere.

With organization and self-control, I think it’s possible to take advantage of credit-card rewards without getting into trouble. If you have a spending problem, however, it’s definitely a bad idea. In that case, you should wait until you get your finances in order and have more control over your situation.

And, anyway, this is just what’s worked for me.

If you earn rewards, what’s your system? And what do you do to prevent any small credit-card disasters?

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