How Credit Cards Helped Us Save $4,304 For Adoption

Have you considered using credit cards to save money or help cover expenses for adoption? We’re sure glad we did.

In less than 3 years, we saved $4,304 for adoption and earned a ton of free flights using credit cards. 

The best part, all of the cash back, airline miles, and other rewards were tax-free!

If you use a credit card responsibly and pay it off each month, then this information can easily help you save an extra $1,000 or more toward your adoption.

My wife and I both work in the non-profit world. We live on a strict budget and track all of our expenses to the penny. We’ve learned how to be very resourceful and stretch our dollars. One thing that has helped us significantly is the the use of credit cards. In fact, we put every expense we can on our credit cards – groceries, travel, charitable donations, you name it.

Credit Cards Offer Amazing Benefits!

Convenience. In some places, credit cards are the only accepted form of currency. When’s the last time you stayed in a hotel or rented a car without a credit card? They won’t even let you in the door these days without one. Credit cards are great for travel and even protect you from fraudulent charges in the event of lost or stolen cards.

Tracking. We link all of our accounts to Mvelopes, our favorite budgeting software. Credit cards allow us to manage and review all of our expenses by month, category or pretty much any way we like. This makes it really easy to stay on track with our financial goals each month and make sure there’s no fraudulent activity. Fraud has occurred only two times in more than 5 years and we caught both charges because of Mvelopes and our ability to match each transaction that comes through.

Build Credit. Using credit cards responsibly and making payments on time will improve your credit rating. Solid credit history is necessary to qualify for a car or home loan with the lowest interest rates. You should aim to have a mix of real estate loans, installment loans and credit cards to show lenders you’re able to manage different types of credit.

Credit Card Utilization is defined as your total credit card balances divided by your total credit limit. This strongly impacts your credit score. Generally, the higher your utilization, the lower your credit score.

Consumers need the convenience of revolving debt from credit cards. In addition, creditors want to see people use their credit and manage it responsibly. By increasing your total credit limit and keeping your balances low, you improve your credit utilization. You should always aim to keep this below 30% on each card and collectively. For example, if you have 2 credit cards both with a limit of $10K. Your first card has an open balance of $2K and your second card has an open balance of $1K. Your credit utilization would be as follows:

Credit Card 1: $2K/$10K = 20%

Credit Card 2: $1K/$10K = 10%

Total Utilization: $3K/$20K = 15%

Our favorite resources to review and manage our credit are Credit Karma and Credit Sesame. Both sites are free and provide updated credit scores, an overview of your credit and general recommendations for improvement. Both have additional features and services that you could pay for but we have never used them. Be sure to review your credit report at least once per year to ensure your accounts are free of unpaid balances, fraudulent activity, and derogatory marks such as collections, bankruptcies, and liens.

Perks like cash rewards, gift cards, airline purchases, points toward merchandise, travel protection and auto insurance are awesome! In less than 3 years, we have earned an additional $4,304 in tax-free cash rewards and several free flights as a result of maximizing the best credit card offers available while not paying annual fees (which are almost always waived in the first year).

The Strategy We Follow For Credit Cards

While there aren’t really any big secrets to this game, we do recommend following a few simple rules to maximize your rewards and improve your credit simultaneously…And yes it’s a game with enough free money to make it fun.

Be selective and only apply for the best offers. We look for offers that pay at least a minimum of 10% cash back on the total spending requirement and/or pay you more than $200. Sometimes, we find offers that meet both requirements. For example, when Chase Sapphire first came out, we had to spend $1,500 in the first 3 months in order to receive $500. That was a staggering 33% return with no risk! It would have been very difficult to achieve those returns in the stock market with substantially greater risk. While that offer is no longer available, you can still earn $500 for spending $3,000 within 3 months of opening an account. That’s a return greater than 16% risk-free on things you probably need to buy anyway. It’s still a great offer!

Have 1 or 2 go-to rewards credit cards, preferably with no annual fee, that you really love and will use in times when there aren’t any new cash back offers worth signing up for. This allows you to continue receiving rewards that you can put to good use. Our favorite is the Southwest Rapid Rewards card with no annual fee because we earn airline miles that allow us to travel and visit family.

Look for one or two banks that consistently have the best cash back credit card offers and use them regularly. We like Chase and Barclays the most but every now and again American Express, Citi and Capital One have deals too good to pass up. When it comes time to cancel your accounts, you want to be sure to have another card, with no annual fee, from the same bank that will allow you to transfer your credit limit and not affect your credit card utilization.

Do not apply for more than 1 credit card every 3 months. We start to look for new offers around the time we reach our spending requirement and earn our rewards. We also rotate who applies for the card (Lori, Jeremy, Lori, Jeremy and so on) so we don’t have unnecessary frequent credit inquiries that could negatively impact our credit score.

If you’re married, do not include yourself and your spouse on the same application. If you do, you will only be allowed to earn the rewards once. However, if you apply individually, after you use the card and earn the rewards, your spouse can then go ahead and do the same thing and you will earn the rewards a second time since it is a different account.

Make your payments on-time and pay your balance off in-full each month. Not doing so would defeat the purpose of getting the cards in the first place. Late payments will incur a fee and, depending on the card company, you could forfeit your rewards and lose special offers such as an introductory 0% APR.

Never cancel until you transfer your credit limit to another card. People mistakenly think that canceling a credit card or closing an account is always bad. Closing an account hurts your credit if you have very few open accounts or when you don’t transfer the credit limit before canceling. The key here is credit card utilization. Let’s say you have 2 open credit accounts each with a $5,000 limit. On card 1, you have a balance of $3,000. On card 2, you have a zero balance. You decide to close card 2 since you aren’t using it anymore. By doing so, you immediately decreased your total credit limit from $10,000 to $5,000 (why would you do that?) and increased your credit utilization rate from 30% to 60%. Don’t make this mistake! It will almost certainly cause your credit score to drop. If you do decide to cancel a card to avoid paying an annual fee, be sure to transfer the credit limit to your go-to card with no annual fee. Assuming all of your other accounts are in good standing, this will not hurt your credit. We’ve done this many times while carefully monitoring our credit scores and have yet to see any negative impact.

One more thing for adoptive families that own a business. You’re probably well aware that there are business credit cards with really good member benefits and cash back offers worth considering. We like to take advantage of these too. However, your bank may not allow you to transfer the credit limit from your business card to your personal credit card. It’s up to you to determine if the benefits are worth paying an annual fee. If so, continue using the card. If not, ask the bank to transfer your card limit to a lesser card with no annual fee.

Not all cash back credit cards have an annual fee, but many of the ones with the best offers do starting in year 2 (year 1 is usually waived). For those that do, remember to cancel your card within one year of opening the account to avoid paying the annual fee. Or if you love the rewards, continue using the card and pay the fee.

Some cards allow you to cancel and re-apply for cards, usually after a specified amount of time, to receive bonuses multiple times. We haven’t tried this yet but each bank has it’s own rules. Be sure to review the terms and conditions for each card. Below is our list of credit cards and rewards by year since 2012:

Credit Card Rewards – 2012

Chase Sapphire Preferred (Jeremy): $540.82 in February

Chase Sapphire Preferred (Lori): $538.85 in May

American Express Prepaid (Jeremy): $25.00 in September

American Express Prepaid(Lori): $25.00 in September

Chase Freedom (Jeremy): $223.00 in October

Citi Thank  You (Lori): $400.00 gift card in October

Citi Thank You (Jeremy): $400.00 gift card in December

Chase Southwest Rapid Rewards (shared by both):  Southwest miles year round

Total: $2,152.67 + Southwest miles

Credit Card Rewards – 2013

AMEX Blue (Lori): $125.00 in April

Barclays’ Arrival (Jeremy): $222.43 in May

Chase Ink (Lori): $664.10 in September

Barclay’s Arrival (Lori): $235.84 in December

Chase Southwest Rapid Rewards Plus (Jeremy): 2 round trip flights + Southwest miles

Chase Southwest Rapid Rewards (shared by both): Southwest miles year round

Total: $1,247.37 + 2 round trip flights + Southwest miles

Credit Card Rewards – 2014

Chase Freedom (Lori): $232.27 in February

Chase Ink Bold (Jeremy): $671.93 in July

Chase Southwest Rapid Rewards (shared by both): Southwest miles year round

Total: $892.27 + Southwest miles

In less than 3 years (and not really focusing on this strategy in 2014 and 2015 since living in the Congo), we earned a total of $4,304 in cash rewards along with 2 free round trip flights and thousands of additional Southwest miles. In addition, we made over 15% return on the money we would have spent anyway. These extra funds could certainly be used to offset adoption expenses and the miles could be used for travel, if necessary, or a babymoon if you want to get away.

Most Rewards From Credit Cards Are Tax-Free!

According to to the IRS, credit card rewards are either a rebate or an award. This distinction determines whether they are taxable. If you’re required to make some form of financial transaction, such as a purchase, in order to receive rewards from a credit card, the rewards are considered rebates and are not taxable. Rebates can include cash back, gift cards, airline miles, or points toward merchandise. The IRS views these rewards as a discount on a purchase rather than income.

As long as a financial transaction is required by you prior to any reward being given, the IRS considers it a discount. Credit card sign-up bonuses that require financial action on your part in order to receive a reward are tax exempt. Some credit cards give you the reward after your first purchase, while others require you to charge a minimum amount of money within a certain time period (like $1,000 in your first 3 months) before giving you the reward. In both cases, no tax is due. To date, my wife and I have never received a 1099 MISC from any credit card company for rewards we’ve earned.

Here’s what you do need to look out for. If no transaction is necessary to receive a reward, except for signing up, then these are awards and considered taxable income. Last year, I opened a checking account at my local bank and I received $100 just for opening the account. Sure enough, at the end of the year, I received a 1099-MISC for the amount of the award and included it in my tax return for 2013.

I could go on all day about the benefits of using credit cards responsibly and the advantages of free float. I can even make a compelling case for credit cards to help with cash flow and making payments during your adoption. However, I understand this is a sensitive subject for some people and using credit cards to earn cash incentives or using a card with 0% for 18 months to help finance adoption is not right for everyone. If you’re going to use this strategy, do so wisely and learn the rules of the game.

Did you use credit cards to help finance your adoption?