Over the next several days, I’ll be detailing all of the tools I use in my financial ecosystem, from accounts to services. I’ll explain what I use and why.

Before I mention the cards I use and why I chose them, I’d like to cover the basics of why you want a credit card and how they should be used. Unfortunately, it took the greater portion of my adult life to gain an understanding of the right and wrong ways to handle credit cards. When used correctly, they can provide huge benefits, such as extended warranties, cash back bonuses, protection from theft and a good credit report. When used incorrectly, you’ll usually only end up with stuff you couldn’t afford and a crushing burden of debt. I know this from experience.

Credit cards should only be used when you have the money to make the purchase in the first place. If you can’t pay for something with your debit card or cash, you shouldn’t be buying it. In a later post, I’ll detail how I manage our budget, and how you can track credit card purchases just like all your other expenditures. In short, if you count your money as spent, regardless of how you spent it (check, debit, credit card, etc.), you can avoid racking up unnecessary debt, and reap the benefits that credit cards have to offer.

I’ve chosen cards which provide the most benefit to me and my family. Interest rates play no part in my decision making process, because we will not be carrying a balance from month to month. Each billing statement is paid in full immediately and I intend to never pay another credit card finance charge for the rest of my life. If you’re not in a position to pay your balance in full every month, the benefits of using a card will be negated (and then some!) by the finance charges you’ll be paying. It’s simply not worth it to use a credit card in that situation. If you’re currently living in credit card debt, look for an upcoming post where I’ll provide solutions to get out.

On to the cards. In order to get the largest return, you’ll most likely need multiple credit cards. I’ve selected, what I believe to be the two best cards with respect to cash back rewards.

Credit Cards: Chase Freedom & Discover More

Both of these cards offer the following benefits:

• Cash back on all your purchases – Chase Freedom gives 1%  cash back on everything. Discover More only gives 0.25% until you’ve spent $3,000 in a calendar year, after which you get 1% for the rest of the year.
• Rotating categories that provide 5% cash back – Throughout the year, you’ll be able to get 5% on gas stations, grocery stores, restaurants, etc. This is where you’ll get the most benefit from having two cards. For example, Chase might offer 5% back on grocery stores in the first quarter of the year, while Discover has the same promotion during the third quarter. For six months out of the year, you could potentially get 5% back on all your groceries. Not a bad deal, right? You can view their discount calendars here: Chase, Discover.
• Bonus cash back when shopping at certain online stores – Discover offers up to 20% back and Chase offers up to 10% back. You usually need to click a link in your card account before making your purchase, in order to get the bonus.
• No annual fee – Most people will dismiss an annual fee altogether. As long as the benefit you’re getting from the card is greater than the annual fee, it can make sense. I’ve read that for people who travel a lot, the American Express Starwood is, by far, the best rewards card, and it has an annual fee. But with the cards I’m recommending, you don’t have annual fees to worry about.

As you can see, the main goal here is to get some money back on things you’re buying anyway. 1% or even 5% cash back won’t end up being a ton of money, but it will add up, and these days, it helps to save any way you can. Also, it should be apparent why it doesn’t make sense to carry balances from month-to-month on these cards. If you don’t pay your statement in full each month, it won’t be long before the amount of interest you’re paying is greater than the rewards you’ve earned.

There are other reasons to use credit cards, as well:

• Insurance coverage on car rentals – Don’t pay extra for insurance when you rent a car, just pay with your credit card. Almost all credit cards offer this.
• Extended warranties on purchases – In addition to the cards above, we also have an American Express card. They will double any manufacturer’s warranty, adding up to one year. I believe all AMEX cards offer this, but it’s not as common with other cards, especially rewards cards.
• Damage & theft protection for your cell phone – If your phone is lost, stolen or damaged, the card issuer will replace it, as long as you’re paying your cell phone bill with your credit card. You’ll typically have to pay a small deductible, usually around $50. Only a handful of cards offer this.
• Piece of mind – Card skimming is all too common these days. If someone skims your credit card, it’s the bank’s money they’re spending. If they skim your debit card, you could be completely broke until it gets sorted out with your bank. I’d prefer to not even carry my debit card around, but in the rare instances I need cash, I don’t really have much of a choice.

We do use a couple other credit cards on a regular basis. As I mentioned above, we have an AMEX card that is used to extend warranties, usually on larger purchases, such as electronics. We also have a Target REDcard because it gives a 5% discount on nearly everything in the store. We do a lot of shopping at Target, so it makes sense to get that 5% discount all the time.

Other cards may make more sense for you, but the Case Freedom and Discover More seem to offer the greatest benefit in cash back rewards. If you’re only going to get one, I’d go with the Chase Freedom, as it allows you to earn 1% on all purchases right from the start, while Discover More requires you spend $3,000 first.

Image: digitalart / FreeDigitalPhotos.net