You should be paying with a credit card whenever possible, and you should be earning at least 2% back on every single purchase.

Credit cards are ubiquitous: It seems like every bank, every airline, and every major company is offering a card, and it can be overwhelming. Maybe you’ve tuned it all out because it feels complicated. Maybe credit cards and borrowing money make you uncomfortable. Maybe you have a card that you suppose is good enough. Or maybe you’re in credit card debt.

Wherever you are now, my goal is to help you move towards an effective credit card strategy, which can easily save you hundreds or thousands of dollars a year.

In this introductory post, I’m going to help you get comfortable with credit cards by addressing these questions:

• Why are youlosing money when you don’t use a credit card?
• How do banks make their money — and how do you use a credit card properly?
• What are some common fringe benefits credit cards provide?

After laying this foundation, I’ll help you pick the right credit card for your situation. I’ll present some effortless cash back cards for those of you who want to keep it simple, and I’ll share my approach to the more complex world of points-earning cards for those of you want to go deeper.

But first, let’s make it clear why you should be using a credit card to pay for everything.

You’re either making money or losing money

Many people with financial discipline stay away from credit cards. They prefer to use cash, checks, or a debit card, all of which force you to only spend money you actually have right now. This instinct and desire to avoid debt is excellent, but it leaves a significant amount of money on the table.

If this describes you, here’s a splash of cold water: In the United States and many other countries, consumers expect virtually every business to accept credit cards. You are probably aware that merchants pay a fee to do so. This fee ranges from 1.5% to 3.5% of the transaction, depending on the type of transaction and the card involved.

Merchants are well aware of this nuisance, and like any other expense, this fee is passed on to you, simply built into the price of everything you buy. For example, when you spend $100 on groceries, about $3 of that goes to the credit card companies. 

In a different country, those groceries might have cost $97. But if you’re shopping in the American economy, you’re paying these fees whether you personally pay by card or not. Sure, you’ve probably seen the occasional small business, gas station, or utility company offer a discount for cash, but the vast majority of businesses don’t differentiate. 

Whether you like it or not, you can’t opt-out, which means the best thing to do is learn to use a credit card responsibly. You can earn 2% back with virtually no effort, and it’s possible to do even better than that.

How credit cards work and how to use them responsibly

A credit card is designed to let you borrow money and pay later. You swipe your card, the bank pays the merchant, and you eventually pay the bank back. What’s in it for the banks, especially if they’re giving away rewards and cash back?

Banks make most of their profit by charging interest on the money you owe them.

Credit cards have horrendous interest rates, and it’s generally true that the more lucrative the rewards are, the higher the rate. Indeed, many consumers sign up for exciting rewards cards, perhaps dreaming of a free flight to somewhere exotic, only to wind up paying far more in interest than they ever get in rewards.

But all of this is completely avoidable. Virtually every credit card provides a grace period, meaning you won’t be charged interest as long as you pay your full statement balance every month. You must have the discipline to do this, and there are two things you need to do to be successful.

The first thing you must do is stop thinking about a credit card as a way to borrow money. Do not spend money you don’t have. While a debit card will prevent you from buying something you can’t pay for right now, with a credit card, you must enforce this for yourself.

The second thing you must do is pay on time and in full. To make this easy, you can set up autopay on your credit card, though it’s also a good practice to review your statement and ensure funds are available a few days before your due date.

If you do these things, you won’t pay a penny in interest. You will, however, earn a bucket of money in rewards.

Common benefits can save you hundreds

In addition to earning cash back or other rewards, a good credit card provides valuable, automatic benefits. Here are just a few examples:

Extended Warranty Protection – Automatically extends manufacturer warranties by a year – You save money when something breaks and by saying ‘No’ to expensive in-store extended warranty packages

Auto Collision Damage Waiver – Automatically covers damage to cars you rent – You save money by declining this coverage at the rental counter

No foreign transaction fees – You save money by charging purchases abroad to your card, which will typically provide a better exchange rate than going through a bank

These are fairly standard benefits on mid-tier cards, and if you have a premium-tier card, the benefits increase. For example, my credit card comes with automatic, free travel insurance, which was a huge help this year: I had to cancel a vacation due to a family emergency, and I had booked $700 of non-refundable accommodation. Thanks to my card’s benefits, I was able to file a claim and this cost was fully reimbursed.

By the way, these examples are all “basic” card benefits, meaning I haven’t even talked about specific card perks like getting a free checked bag on a certain airline or earning extra points for certain types of purchases.

Editorial note: I’ve presented these benefits examples at a very high level. Please read your card’s benefits guides for full terms and conditions. Exact benefits vary from card to card, and not all cards offer the mentioned benefits.

So what’s the right card for me?

After reading this article, I hope you’re much more interested in paying by credit card as often as possible, which can save you money as well as activate valuable benefits. I also hope you see clearly how to use a credit card responsibly, avoiding the pitfalls of fees and interest payments.

I’ll be adding additional posts to continue the credit card discussion shortly. Please join my email list and follow me on Facebook to make sure you catch the next part of the story!