The 1-2-3 Money Plan Part 18

3. Get more than 1 percent.

A rewards card gives you something back based on your purchases. Some give frequent flyer airline miles, some merchandise points, others cash. Some give you greater rewards based on where you shop, boosting rewards at gas stations and supermarkets, for example.

There's something so alluring about getting something for nothing. a.s.suming you have a high enough credit score to qualify for rewards cards, here's how to choose.

1. Go Online.

A number of Web sites will help you choose a rewards card, or, at least, you can survey the choices. Among the Web sites are CardRatings.com, IndexCreditCards.com, and LowCards.com. The previously mentioned BillShrink.com is also worth using. And, watch your mailbox. Some card deals are only offered directly by mail to certain potential customers. And check with your credit union. If you don't have a credit union, you probably qualify to join one. See www.findacreditunion.com.

2. Choose Cash Back.

Although you can choose among a wide range of credit card rewards, choose one with cash back on all your purchases. The problem with points and airline miles is the card issuer can change the value of those "currencies" anytime it wants. It can require more points for the same merchandise or more miles for the same airline ticket. Never mind the ha.s.sle of trying to cash in points or miles-fat chance you'll be able to use those frequent-flyer miles during a holiday, for example. Frequent-flyer miles can expire, and many miles cards will charge you an annual fee, which cuts into whatever benefit you get.

Curtis E. Arnold, author of How You Can Profit from Credit Cards, points out that it could take three years to earn a free ticket purchased with frequent-flyer miles from your card, a.s.suming annual spending of $8,000. If that card carries an $80 per year annual fee, your "free" ticket just cost you $240 in fees, compared with the many no-fee credit cards available. At the same level of spending, you might have earned enough with a simple 1 percentback cash rewards card to pay for a ticket.

QUICK TIP.

If you already have airline miles, use them soon. With a struggling airline industry, airline miles will probably become less valuable. Airlines are charging larger fees for cashing in frequent-flyer miles for supposedly "free" flights. And airlines are cutting flights, which might make it harder to use miles. Experts also believe major carriers will start requiring flyers to use more points for flights.

The card issuer can't change the value of cash. Moreover, guess what you can buy with cash?

Anything, including merchandise and airline tickets.

So, cash is a far superior currency than points and miles because it gives you more options. And cash programs are also easier to use. The real dollar value of points or airline miles should have to be far higher than cash to persuade you to voluntarily lose the flexibility of cash and accept an inferior form of rewards payment.

Be wary of charity rewards credit cards, too. The good part about a card that donates your rebate to a charity is it makes your contributions automatic. The bad part is most cards donate just 1 percent of your spending or less to the charity. A better plan is to use a cash-back card and write an annual check to the charity for the amount of your yearly rebate. The charity will get more, and you can take a tax deduction.

Once you get a cash-back rewards credit card, throw as many charges on it as you can. Even middle-income households are likely to get back several hundred dollars a year, with big spenders getting back more than $1,000.

3. Get More Than 1 Percent.

You can do better than a cash rebate of 1 percent on all your purchases. Many cards offer 2 percent to 5 percent on certain types of purchases, such as gasoline and groceries, and 1 percent on everything else.

As of this writing, a great card for big spenders-charging well over $1,000 a month-is the American Express Blue Cash card. With a tiered reward system, bigger cash rebates kick in after charging $6,500. Details are at AmericanExpress.com.

There's no clear choice for smaller spenders. Find a card that gives you at least 1 percent right away, gives you the most rewards for your spending patterns, and will cut a check or credit your account at $25 or $50 increments.

Offers for rewards cards change regularly.

Besides getting more than 1 percent back, here are other considerations: * Avoid cards that charge an annual fee.

* Give preference to cards that automatically send you the rewards payment as a check or credit the amount to your account. That's better than having to remember to request a check when your points acc.u.mulate to a certain cash-out level.

* Choose a program with no rewards limit, or at least one you're not likely to max out.

* Look for a bonus reward for signing up.

* If you choose an American Express or Discover card as your primary card, you'll need a rewards Visa or MasterCard backup because they are accepted in more places.

One final warning: Don't get so infatuated with rewards that you end up spending more than you would otherwise just to earn more rewards. It's likely to be a net loss for you.

How to Get Out of Debt.

Here's a newsflash: The first step to getting out of debt is to stop adding to it. You do that by saying "no" to a series of payments with interest and, instead, paying in full.

The TV show Sat.u.r.day Night Live a few years ago aired a skit with comedian Steve Martin, who was guest-hosting. It was a spoof on an infomercial promoting a revolutionary get-out-of debt plan. The "unique program" was t.i.tled, "Don't buy stuff you cannot afford."

The skit opened with a discouraged couple sitting at their kitchen table wondering how they'll ever get out of debt. Enter the author of a one-page book, Don't Buy Stuff You Cannot Afford.

Woman reads aloud from the book: "If you do not have any money, you should not buy anything."

Woman to husband: "There's a whole section here on buying expensive things using money you save."

Couple looks thoroughly confused.

Woman: "What if I want something but I don't have any money?"

Author: "You don't buy it!"

Man: "Let's say I don't have enough money to buy something. Should I buy it anyway?"

Author: "No!"

Woman: "What if you have the money, can you buy something?"

Author: "Yes!"

This skit goes on, but you get the idea. The spoof infomercial says if you order now you can receive the additional book, Seriously, If You Don't Have the Money, Don't Buy it, along with a 12-month subscription to Stop Buying Stuff magazine.

The point is to stop the buying and borrowing behavior that got you into debt in the first place.

How to Get Out of Debt, 1-2-3.

1. Quit borrowing money.

2. Quit saving money.

3. Pay small debts first.

1. Quit Borrowing Money.

If your debt is growing, there are only two explanations. You're spending too much money, which this book should be able to help with. Or, you have an income problem. You're charging necessities on the card because you don't make enough money to cover bare living expenses. Figuring out the reason for running up credit card debt is the first step toward making sure it doesn't happen again.

The culprit of debt is often credit cards. If you can't trust yourself with credit cards, stop using them-cut them up, freeze them in a block of ice in your freezer, whatever. Just don't close accounts because that will hurt your credit score.

Well-meaning people will advise you to transfer balances to lower-rate cards or continually surf the balance from low introductory rate to low introductory rate. Card surfing is not inherently bad, but it's not nearly as effective as actually paying down the card balances. Surfing merely shuffles debt around. And you might even add to debt by incurring transfer fees.

For people in deep debt, it's like the old metaphor of rearranging deck chairs on the t.i.tanic. It doesn't address that sinking feeling.

So, unless you have a credit card at more than 20 percent interest and can get a substantially lower rate, focus your energy on paying more and surfing less.

This is one case where "throwing money at the problem" actually works.

2. Quit Saving Money.

This might be surprising advice. After all, saving money is a good thing, right?

The problem is your debts are probably costing you more than your savings are earning for you. For example, you might be paying 18 percent interest on your credit card debt and earning less than 5 percent on savings. That's a huge net loss.

In a simple-interest example, depositing $5,000 in a 5 percent savings account earns you $250 a year, which the government then taxes. But if you used that $5,000 to pay down an 18 percent-interest credit card, you save $900. And you pay no tax on that kind of savings.

In fact, after you have a starter emergency fund of $2,500, you can use other saved money to pay off high-interest debt. Again, it makes no sense to have a certificate of deposit earning 5 or 6 percent while paying double-digit interest on debt.

A possible exception to the "Quit Saving" rule is if you have an automatic retirement savings plan, such as a 401(k), 403(b), or automatic deposits to a Roth IRA. If that kind of plan is already on autopilot with 10 percent or less of your income, you can leave it alone. A definite exception is if your employer matches your contributions in a retirement plan. You want to capture all of that free money you can.

However, if you can get intense about paying off your debt, stopping retirement savings for a short time will get you out of debt faster.

3. Pay Small Debts First.

How do you prioritize which debts to pay extra on? The biggest debt or smallest debt? Highest interest rate or lowest?

I like a hybrid plan that goes like this: * Pay off debts of less than $1,000 first, from smallest to largest, while paying minimums on other debts.

* Then, pay off debts greater than $1,000 from highest interest rate to lowest, while paying minimums on others.

Each time you kill off a debt, you apply that payment to the next debt. When that's done, you roll the combined total into the next debt, and so on. That's the debt s...o...b..ll.

This debt-repayment plan is a modified version of a plan espoused by Dave Ramsey, a radio-show host and author of The Total Money Makeover. He didn't invent the idea of paying debts smallest to largest and s...o...b..lling them, but he's best known for it.

Of course, mathematics says you should pay the highest interest-rate debts first to avoid paying the most interest. This is easy to understand and logical.

But getting out of debt is a lot like dieting. It's difficult and takes a huge helping of self-discipline. By paying off small debts first, you can wipe out a number of them and feel like you're gaining traction and succeeding. It's the atta-boy or atta-girl to help you keep going and pay off more debt, just like losing a few pounds during the first days of a diet. It gives you encouragement to continue.

So much with money has more to do with what's between our ears than what's in our wallets. The emotional lift from wiping out small debts is well worth whatever small amount of interest you might have saved by paying first on a huge high-interest debt that takes years to eliminate. Just make sure to get rid of those small debts quickly.

Once you get to your large debts, you'll be better off paying more attention to the interest rate. For example, you would pay off a $10,000 credit-card balance at 18 percent before paying off a $9,000 auto loan at 7 percent.

Here are answers to some other common debt questions.

What about My Mortgage?