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the other edge of credit cards

Hey, I’ve got a secret to share. It’s just between you, me, and the Internet. You ready?

I use credit cards.

I know, right? What about Dave Ramsey’s vaunted “plastic surgery”? Aren’t personal finance geeks supposed to be all about cutting up the CC’s and living off of cash? And aren’t I using the Envelope Method, myself?

Yes, I am, and cash is great — there’s nothing quite like it for knowing exactly how much you have left to spend in your budget. But the fact is, not using the credit cards at all would be leaving cash on the table — to the tune of hundreds of dollars a year.

So here we have the other edge of the double-edged credit card sword (now there’s an image for you). On the one hand, when used the wrong way, credit cards can cost you thousands of dollars in interest. On the other, when “rewards” credit cards are used the right way, you can get hundreds of dollars in cash back. And that’s not to mention other added perks. My favorite is the automatic extended warranty — when I use my card to make a purchase, the duration of the warranty on the item is automatically doubled, up to a full year.

Right now, if you like cold, hard cash-back rewards, two of the best cards out there are American Express Blue Cash and Chase’s Rewards Visa.

I highly recommend Blue Cash. It has all the perks of a normal American Express, including the aforementioned extended warranty, and also pays 3% or 6% back at grocery stores, 2% or 3% at gas stations and department stores, and 1% on everything else. This is new as of April 2011. It used to be that Blue Cash had this tiered system where you got 1% or 0.5% until you spent some thousands of dollars over the course of the year, but that has recently changed; now that the tiers are removed, it makes sense for even more households. And of course there’s no annual fee — for the 3%/2%/1% version, anyway; for 6%/3%/1%, you pay $75 a year. Whether it’s worth it is a simple calculation, if you track your expenses.

(You do track your expenses, right?)

But back to the cards: the Visa is good, as well. You get 3% back on purchases, 2% at gas stations, restaurants, and drugstores, and 1% on everything else. You can buy nearly anything on (deodorant! video games! phone chargers!) — and since you’re not charged sales tax (edit: in some states; here in Texas, that’s going to change as of July 1, 2012) or shipping (if you choose Super Saver), you’ll almost always get a good deal, even without the normal discount that is applied to most items. So 3% on top of that? Sounds good.

The big difference between these cards and others like Discover is that there is no limit to the rewards you can get. Discover was a pretty good card when it came out; you get up to 1% back on purchases, and somewhat recently they added 5% back on certain categories for certain limited times. But as I pointed out last year, you only get the extra 5% bonus up to a certain paltry amount of your purchases, say $300. Generally, it’ll net you less than $5 a month above and beyond the 1% (or less) you normally get.

A final word: all this talk of rewards may sound exciting, but caveat emptor. A friend of mine got really excited when the card came out, as they did a bunch of shopping there; however, a few months later they were several thousand dollars in debt, and the interest rate on the card was nasty, to the tune of almost 19%. That’ll null out your 3% bonus real quick.

(Oh, and if you’re hunting for a new credit card for whatever reason, I recommend NerdWallet.)

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