Three Credit Card Benefits: Rewards, Transfers, and Floats

This afternoon, I just converted 46,556 points from one of my credit card into $465.56 cash and have it deposited to the bank account I have maintained with the bank I got the card from.

Not too bad for three months of “work”! Really, all I have done is apply for the card that promised me 40,000 points to sign up and one point for each dollar that I spent.

Aside from building up credit, credit cards have some serious benefits: Rewards, Transfers, Floats

1. Reap Rewards

Many cards offer points for you to sign up with them, as many as 50,000 points. Typically you just want to use the card and spend some money during the first few months.

If you want travel rewards, free movie passes, or even cold hard cash, just pull out the plastic.There are rewards to suit just about every interest. The challenge becomes picking one! If you carry a balance, understand that the interest rate may be higher than what you can get elsewhere. And watch out for strings attached to the rewards, such as minimum purchase requirements, blackout dates for travel, or caps on the amount you can earn.

Once you’ve found a card you like, you may find yourself using it for all your purchases. That can be rewarding – and addictive — so make sure you don’t overspend just to earn rewards.

2. Transferred Balances as Cheap Money

Interest rates are creeping up on all types of loans, but those introductory low-rate credit offers just keep coming. My mailbox is flooded with offers like these:

0% for six months!

3.99% for the life of the transferred balance!

0% financing for one full year with a major home improvement purchase!

Some consumers successfully use these low-rate offers to consolidate debt, pay college tuition, or even to pay off more expensive home equity lines of credit.

Of course, you have to watch out for the traps, which include fees of as much as 4% on a balance transfer, and rates that skyrocket if you make a payment even one hour late. Also keep in mind that maxing out a credit card can lower your credit score, resulting in higher rates on other credit card balances you carry. So tread carefully, but take a lower rate when you can.

3. Month-to-Month Float

Banks and insurance companies play the float all the time, investing the money you pay for premiums or park in a savings account at 0% interest. If you can put your money to better use elsewhere (a high yield savings account would be one option), you will come out ahead.

You can do that by playing the float yourself, and a credit card is the perfect way to do it. Charge a high-ticket item on your credit card and pay it in full when the bill is due. Time it right and you could get nearly two month’s interest free. Find out when your credit card issuer’s billing cycle closes (call customer service or check your previous statements) and then make your purchase right after that date. The charge won’t appear until next month’s bill, and depending upon the length of the grace period, you might luck out with a good healthy float.

This strategy does not typically work if you are carrying a balance on your credit card. Virtually all credit cards use the average daily balance method including new purchases to calculate interest. That means you don’t get a free ride on new purchases if you start the billing period with a balance.

Another way to play the float is to take advantage of interest-free financing. Let’s say you buy a $3,000 flat screen television with 0% financing. If you park that $3K in your high-yield savings account at 4.5%, you’ll have $135 at the end of the year. Watch those monthly payment and final payment due dates carefully, though. If you slip up, you will get hit with a hefty finance charge – probably all the way back to day one.

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