Credit cards get a bad rap when it comes to frugality. Stories of people maxing out their credit cards and then paying more in total interest than they borrowed in the first place help to promote this notion. And the credit card industry doesn’t help itself much, particularly when it jacks the interest rate up on cardholders when they miss a payment. But the truth is that credit cards can promote frugality and improve finances IF they are used responsibly. So here are ten ways credit cards can actually promote frugality and improve one’s finances.

How credit cards can promote frugality

1. Tracking Expenses: Credit cards are a great way to keep an eye on expenses. I put almost everything we buy on either a credit card or a debt card. Typically we choose credit cards because of the rewards (see below), but a debit card works just as well. At the end of the week or month, it’s easy to see where all the money has gone.
2. Reducing interest: Balance transfer credit cards are a great way to to eliminate interest expenses. We have a balance on our home equity line of credit from a kitchen remodel, and I transfer large balances over to 0% credit cards to reduce the interest we pay.
3. Earning interest: You can also use 0% cards to transfer balances into a savings account to earn interest. At one time we had access to $50,000 in 0% balance transfer funds for 12 months. At 4% interest, we could have earned $2,000, although we used it to pay off the home equity instead. But if you have no debt, these 0% introductory rates can be used to simply put some extra cash in your pocket. The key here is to get a no fee balance transfer.
4. Saving on gas: With the price of gas skyrocketing, it helps to do everything possible to save on the cost of fuel. There are several gas credit cards that offer cash rebates on gas purchases as high as 5% or more.
5. Saving on Vacation: There are many credit cards that offer valuable hotel, airline and care rental rewards. My personal favorite is the Starwood Preferred Guest card by American Express. The card offers Starpoints toward stays at Starwood hotels, and the points can be converted to miles as well. With your first purchase, you earn 10,000 Starpoints, enough for 3 free nights at a category 1 or 2 Starwood hotel.
6. Building credit: Responsible use of credit cards can help build a credit history that can save you a bundle when you go to buy a house. The interest rate a bank will charge an individual depends in large part on the person’s credit score. The higher the score, the lower the rate. Using a credit card that you pay in full each month (or at least on time) will improve your credit score over time. Having available, unused credit will improve your credit score, too.
7. Saving on taxes: This tip is particularly important if you run a small or home based business, but it applies to everybody. Making purchases that are tax deductible using a credit card gives you an audit trail of the purchase and reduces the risk that you’ll forget about the deduction at tax time. Every year when I sit down to do my taxes, I take out my yearly American Express statement to confirm that I’ve included all the charitable and other deductions we are entitled to take.
8. Saving for college: If you have a 529 plan with Fidelity, they offer an American Express card that contributes up to 1.5% of your purchases into the 529 plan.
9. Saving for college II: With Upromise, a percentage of purchases you make can be contributed to a 529 plan. It works similar to the Fidelity American Express, except that the 529 plan does not have to be with Fidelity, and you can use just about any credit card or debit card. And signing up is free.
10. Shopping at Costco: Costco is one of my favorite places to shop. Now with the TrueEarnings® Card from Costco and American Express, you can earn 1% on general purchases, 2% for travel-related purchases, and 3% for restaurant and gasoline purchasee.

Photo Credit: v i p e z via Flickr