Credit cards

Credit card companies exist solely thanks to people who don't understand the difference between a good debt and a bad debt. Those people can't even restrain themselves from compulsory spending. But credit cards offer many opportunities to the smart and prudent people, such as:

• protection
• cash-back
• convenience
• free stuff
• arbitrage opportunity
• credit score check

Protection

Whenever you use a credit card, it doesn't matter if it's in a big supermarket or a small shop, there's a risk of fraudulent charges. Usually you have about 20 to 60 days to report any unauthorized transactions. When you do it, then the bank will try to recover the money. The bank takes the risk.

Whenever you use your debit card, you take the risk. Most banks offer some kind of protection for free. But when it happens, your checking account will be charged, often with overdraft. You may get the money back, but you may have to wait some time. The bank doesn't care about chasing fraudsters, because it's your money at risk, not their money.

Cash-back

Cash-backs were invented to help the rich become a little bit more rich at the expense of the poor. The smart are rewarded for being financially responsible. When someone pays with a credit card and earns a 5% cash-back, the credit card company charges the merchant that amount (on top of their fees). It forces the merchant to rise prices. If half of his clients pay with cash (or debit cards) and the other half with credit cards with a 5% cash-back, then the merchant just have to rise the price of a product only by about 2.5%. In summary, the cash-back you earn is paid in part by you and in part by those poor people who still use cash at the register.

Convenience

Use credit cards to make it easier to watch your spending. In general use separate credit card for each spending category. It will make preparing your own monthly financial statements much easier. For example: pay with a gas card for gas only, use only one card to pay for groceries, etc. Most credit cards are best used for only one type of spending anyway. For example, Discover Open Road Credit Card pays 5% on the first $100 you pay for gas in a month, Chase Freedom Card pays 3% cash-back on groceries.

Free stuff

There's no such thing as free lunch, except for a cheese in a mousetrap. - Russian proverb.

There's no "free" thing in this world. Everything must be paid by someone, but it doesn't have to be you. Whenever you're doing something, you may have a choice to get some "free" stuff, just by doing this some other way. For example, instead of using any credit card to buy books at your local bookstore, you may use a credit card from Amazon.com and buy the book online. You'll get a $30 credit for signing up for that card, you'll have a free shipping if you buy several books at once at a total cost of $25, and you'll also earn some points. Don't forget about the sales tax, though.

Another example: Discovercard company paid over $200 to some other company for every new cardholder. That company gives free stuff (at cost of about $150) to anyone who applies for a Discover credit card. More details on FatWallet.com. Even if you don't like the stuff, you can sell it on eBay.com and make about $100.

Arbitrage Opportunity

Credit card arbitrage is the most easy and available almost to everyone arbitrage method. When you get any of those "0% APR and $0 fee on balance transfers" offers, then take it. Read the offer very carefully, several times if necessary. Especially that small print. You don't want to miss any hidden fees. The application asks for a credit card number to make the balance transfer to. Write your debit card number instead. This way you'll get the money credited directly to your checking account. Be very careful with that money. Don't even think about spending it, or investing in stocks. Put the money in a high-yield money market account or a saving account. The best rates you'll find on BankRate. Usually the choice is either DiscoverBank or EverBank, sometimes HSBC Direct.

Some banks offers are only "0% APR on purchases only". Then you'll have to build the balance over some time paying everything with that credit card (you'll lose ability of watchning your spending). Pay only minimum each month (or $1 more than minimum to improve your credit score). As the balance builds, remember to put equal or even higher amounts into a high-yield MMA - without that it won't work! When the "0% APR" period is over, then if possible, pay the balance off with another "0% APR and $0 fee on balance transfers" offer.

If you invest in a CD, then you may need some extra money on hand to pay off the balance without losing interest because of early withdrawal. As in business, if a long-term asset is financed by a short-term liability, it could lead to liquidity problems. It is called "asset-liability mismatch". Avoid it.

Be very careful, even pedantic with meeting payment deadlines every month.

You won't get rich doing that. If you get a $5,000 for a year at 0% and you put it in a 4% CD, then you'll make only $200. After-tax it's even less than that ($150 if you're in a 25% tax bracket). But that's free money anyway.

It will also teach you how to use credit wisely. The more such debt you incur this way, the more free money you'll earn. That's the difference between a good debt and a bad debt.

Warning! Your credit score will fall. Use this method only if you don't plan to apply for a loan in the nearest future, like buying a house or a new car.

Credit score check

This is another "free lunch". Some banks give online access to FICO credit score. One example is WaMu Platinum MasterCard. Only FICO credit score is available. The actual credit report you can get for free once a year from www.AnnualCreditReport.com, but you have to pay for the FICO credit score while WaMu gives it to you for free.

It's a good idea to track the credit score changes month to month. Create a graph in an Excel file and keep notes whenever something in your financial situation changes. This way you'll learn ways to manipulate your credit score. May be quite handy someday.

Remember to use credit cards responsibly.

Think what you do when you run into debt; you give to another power over your liberty. - Benjamin Franklin