Over the past months, I’ve gone on a personal finance journey. Mostly, I’ve just learned the basics – how to properly analyze your paycheck, a bit about credit, some stuff on budgeting and expense tracking – but I’ve also realized one other thing:
Virtually no one my age knows much about personal finance.
To put it nicely, this is scary. Most of my friends and classmates are incredibly smart individuals, yet are completely lost with the basics of how a credit card operates. I’ve heard people give advice that was bad, or even actively harmful, and sound 100% confident that they were right while doing so. Personal finance isn’t really even about money, it’s more about having the mental stability during a recession, or when you lose your job. It’s about being able to enjoy the things you want to do and focus on the stuff that actually matters to you instead of worrying about if you’ll be able to retire at the age of 45 or 65, or if you can make the mortgage payment this month. It’s a lot easier to avoid getting into a financial hole if you have the right habits; recessions suck a whole lot more if you aren’t financially set-up to weather the storm.
So, seeing as my blog gets about a couple hundred views for a bad post and near a thousand for a good one, I’ll leverage the only loudspeaker I have to write about something that’s fairly boring, but important nonetheless. I’m going to start with credit cards, as it’s something that I feel relatively knowledgeable about, but not because it’s the most important thing.
A Bit of Motivation: Credit Cards are more than Free Money
The usual advice is that there’s no such thing as a free lunch. Free Money doesn’t exist. You can’t get something for nothing. That advice is correct 99.99% of the time. However, it’s not fully true for credit cards, because provided that you use a credit card responsibly, you can actually get some pretty nice rewards/points/cash back from using them. Here’s a look at the rewards I’ve earned so far:
Credit Card #1: $176.40
Credit Card #2: $431.57
Credit Card #3: $291.34 - $95 in fees
Total: $804.31, after taking out the $95. This doesn’t include money I’ve earned from referring other people, and it doesn’t include current points I’ve earned but not yet redeemed. This is, 100%, just the money I’ve picked up from using my credit card instead of using cash. In case you’re wondering how this is possible, Vox put out a great video explaining how this all works.
Rewards are just one of the many benefits that credit cards offer. As this Reddit post explains, it’s safer, builds credit, offers purchase protection, and you can even get other perks for using one…
But You Have to Be Responsible
Credit cards are like knives: they’re useful tools in the hands of someone who’s knowledgeable about what he/she is doing, and completely dangerous in the wrong hands. The only way to properly use a credit card is to pay it off, in full, each month. That implies the ability to pay it off in full each month, which implies that you can’t spend money you don’t have. You’re not magically paying your bill at a restaurant with a piece of plastic, you’re just having someone else pick up the tab for you now so that you can pay them back later.
I also wonder if I make purchases that I wouldn’t have otherwise made due to the ease of swiping or tapping the card versus paying cash and carrying around bills and coins. Either way, the point is that self-control is important when you decide to get and use a credit card.
What I’m not Going to Talk About
For brevity, I’m going to focus on the more important things (in my mind). Credit is an incredibly broad topic and credit cards are just one aspect of it; therefore, I’m not going to write about credit reports or credit scores or building credit. I won’t write about interest rates (since, if you’re using a credit card properly and paying off the entire balance every month, you’ll never pay interest in the first place) or churning. This post is just the basics of understanding cash back rewards. I don’t talk about “points” as much (mostly because it’s a whole additional level of complexity).
Evaluating a Credit Card: The Terminology
In order to understand the world of credit cards, you have to speak the language. Thankfully, the language is mostly simple. Each credit card belongs to a network like Visa, American Express, Mastercard, Discover, etc. This determines where you’re able to use the card (while most people think that American Express isn’t as widely accepted, I’ve personally never had any issues).
For the purposes of using credit cards to gain benefits, there are 3 important qualities: (1) fees, (2) points and perks, and (3) redemption options. Fees are pretty simple: you’ll pay an annual fee each year to have that card (many cards exist without an annual fee, while more “elite” cards can run you $95 or $550 each year). Some cards may also have international fees associated with using the card overseas, but the chances are that 99% of transactions will stay within the US, so it’s not worth worrying about.
The perks side is where things get interesting. Certain credit cards offer certain rates of earning points on different categories. For example, a credit card might offer 5 points per dollar spent on groceries, 2 points per dollar spent on eating out, and 1 point per dollar spent on everything else. On top of that, credit cards might have certain perks associated with them, such as access to airport lounges or stolen phone coverage. Finally, credit cards might have signing bonuses, which give you a one-time bonus once you get the card and charge $X to it within the first Y months. Converting points earned into cash in your pocket depends on the redemption options – typically, cash back cards offer about 1 cent per point (though this might change from card to card). Some cards might allow you to turn points into airline miles or something else, but I personally prefer to just focus on cash back due to the ease and simplicity of understanding what exactly I’m getting.
My Credit Cards
While I’m not exactly a complete expert on the topic, I can at least offer my own personal insights into the credit cards that I have. Currently, I have 4 credit cards in my portfolio:
Citi Double Cash (Mastercard)
My “default card”, the Citi Double Cash credit card offers a flat 2% back on all purchases. This is a very-straightforward, no-nonsense credit card, and I think every credit card “portfolio” ought to have at least one strong across-the-board cash back card. There’s usually no signing bonus for this, but there’s also no annual fee, which makes it a pretty straightforward calculation.
This is one that you should try to have in your wallet. It’s your catch-all for online purchases, and random shops where you want to buy something that doesn’t fit into one of the categories covered by other cards.
Schwab Investor Card (American Express)
My first credit card that I ever got, the Schwab Investor Card is (I believe) open to virtually anyone with an “eligible account” from Schwab. It’s similar to the Citi Double Cash card in that it offers a flat, across-the-board 1.5% cash back, but it has a $200 signing bonus if you spend $2,000 in the first three months and no annual fee. It’s an American Express card, and all cash back is deposited directly into your Charles Schwab account without you having to do any work.
Compared to the other cards on this list which probably require some level of credit history to obtain, the relative ease of getting this makes it one of the better “starter” cards out there. The rewards are pretty solid and straightforward.
American Express Blue Cash Preferred
The first credit card I ever got with an annual fee ($95), the Blue Cash Preferred gives 6% cash back on groceries and streaming subscriptions (e.g. Netflix, Spotify), along with 3% on transportation (e.g. Uber/Lyft, public transit) and gas (and 1% on everything else). If you cook at home, this is probably worth getting, but you should definitely crunch the numbers to make sure you’ll get your money’s worth. I used Mint to download a list of transactions I made in the past year and calculate how much incremental rewards I would earn, and for me the math came out in favor. There’s a signing bonus of $250 if you spend $1,000 in the first 3 months, but if you get a referral or open up the link above in an incognito tab, the signing bonus increases to $300, which means you functionally offset 3 years of your annual fee right from the get-go.
The Blue Cash Preferred is great for people who cook and eat at home, but it’s probably not very helpful if you tend to eat out much more.
Uber Card (Visa)
The Uber card is probably one of the best no-annual-fee cards out there. It grants you 4% cash back on dining and restaurants, 3% on hotels and airfare, 2% on online purchases, and 1% on everything else (due to occasional issue with how an online purchase is encoded, I normally just use the Citi Double Cash card to make purchases 95% of the time). It also has a $100 signing bonus after you spend $500 in 3 months, and a $50 “subscription credit” after you spend $5,000 each year (a benefit that I mostly ignore, thanks to the Blue Cash Preferred).
The Uber card is amazing for people who eat out.
[Update: On October 28th, 2019, Uber and Barclays announced that the Uber card was going to be refreshed, and the new version is pretty bad. I no longer recommend getting it, and this post details why.]
About that Signing Bonus
If you’re thinking about whether you can hit the signing bonus or not, I’d consider looking at all of your expenses on a month-to-month basis to figure out how much you spend in total each month. At least until your signing bonus is earned, you should probably try charging everything to that card, despite the lower percentage cash back. I also made sure that I’d pick up the tab whenever I ate out with my friends (and had them Venmo me after). If worse came to worse, I could have always put a rent payment on the card (though there’s usually a fee associated with that).
Think About Marginal Rewards
It’s also worth mentioning that in considering a new card to add to my portfolio, I only think at the margin. If a new credit card came out that offered 5% on eating out, groceries, hotels and airfare, and gas (and 1% of everything else), it actually wouldn’t be all that attractive to me anymore because I already earn 4% on eating out, 6% on groceries, and 3% on hotels, airfare, and gas. If there’s no annual fee on this card, that’s great – I’ll probably stop using my Uber card altogether as a result – but if there were an annual fee, I couldn’t calculate the rewards I’d earn as 5% on those categories; I’d have to look at if the incremental rewards that I wouldn’t have already earned would be worth it. For this example, I’d have to see if an extra 1% on eating out and 2% on hotels, airfare, and gas is worth paying an annual fee for this hypothetical new card.
Some Other Resources
The best resource for anything personal finance related is probably going to be r/personalfinance. Reddit is an amazing resource for just about anything; personal finance is one of the site’s most popular subreddits. The wikis on credit cards and credit building, in particular, are fantastic.
For credit cards in particular, I’ve heard a lot of talk about The Points Guy, but I’m honestly not a huge fan. For one, he’s way more travel-focused than I personally am (though if your priority is actually travel, maybe he’d be more relevant). His evaluations of credit card points usually require booking flights on a particular airline, as opposed to redeeming them for straight cash-back. Like I said earlier, I’m not going to touch on points, as it’s a whole other world of complexity, but I’ve personally been content with “just” straightforward cash back that’s easy to understand. Also, the business model behind the website seems to be built on referrals and partnerships, so there’s potentially a conflict of interest. There are a ton of other websites that will pop up if you just Google things.
If you’re interested in reading more, I wrote about a post about getting started here.
This post was originally written on October 17, 2019. I might update it occasionally, and I’ll mark when/where that happens, but information might easily become outdated.