Wednesday, July 14, 2010

Credit Cards

A lot of people say that in order to save money and get out of debt, you need to cut up your credit cards and use only cash. While that advice is very sound for getting out of debt, I'm a firm believer in incorporating credit cards into your thrifty lifestyle as long as you're smart about it.
There are three big ways to be smart about credit cards:

1. Never carry a balance. Never, never, never. If you cannot pay off your card each month, you are spending too much and need to take a step back a re-evaluate what you're buying. Paying interest on a credit card is just giving someone money for nothing, and that is the least fun thing ever. Pay off cards, in full, every month or don't have them.

2. Make multiple payments per month. This would have been laughable ten years ago, but with online bill pay, there's really no excuse to not. I make a credit card payment every time I collect a paycheck--weekly. I look at my pay, I check my balances and I look at other bills I may have. Even if I don't have a balance on a credit card, I may make a payment just to get a little ahead. My cell phone and netflix automatically charge to my American Express once a month, so I know that money isn't going to be sitting there long. Doing this also gives a shot in the arm to a flagging credit score. It's the fastest way to boost a flagging score, and is quite simple to pull off.

3. Take advantage of rewards. If you have a good or even just moderate credit score, there is no reason to settle for a high interest no benefit credit card. Shop around for cards that give you the kind of rewards you'd like to see i.e. travel points, gift cards at certain stores or cash back. Be mindful of annual fees, as a lot of cards that reward with airline miles do have annual fees. Just like interest, there is no reason to pay an annual fee for a credit card, unless you rack up so many air miles that it actually pays off. Do the math for yourself and see what works best for you.

In order to maintain a good credit score, you need to have and use credit. Having a good credit score will come in handy when requesting a home loan, car loan or any other major type of credit. It influences the interest rate you get on major loans, and can save significant sums of money in the future. I recommend two major banks cards and one store card. No one should have more than three credit cards because that does not look good to the credit reporting agencies. The way they tabulate your credit score is by looking at income and total amount of credit available. If you have ten cards and make $25,000 a year, it reflects poorly on you even if those cards are in good standing.

However, it also reflects poorly if you rush to close five credit cards in one day. If you have a large number of cards, close one every six months or so. If you just need to get rid of one or two, wait up to nine months to close the account. You should stop using the card, but closing too many account in rapid succession is another red flag.

Presently I have one American Express card which nets me travel points for every dollar that I spend. Once I reach a certain level of points, I can cash them in for a $100 credit on a travel purchase like flight, hotel, rental car etc., or I can take $50 cash. This is my primary card that I use for nearly every purchase I make. I also check my balances at least every other day to make sure there aren't any unauthorized purchases, and to track my spending independent of my budget.

I also have one Visa card because not everywhere takes American Express, and it's good to have two cards from major banks. It's also nice to have a backup should something happen to my American Express card. I opted for the visa, which issues points similar to the American Express except you can redeem these points for giftcards. They also recently added a whole host of other point redemption options including cash back. I rarely use this card, except for Amazon purchases, but it's nice to have a backup.

I have one store card as well in my cache--an Old Navy card. I chose this one because I do most of my shopping at Old Navy, plus this card also works at Banana Republic and The Gap. For every $200 I spend, I get a $10 gift certificate, plus they send me birthday presents and coupons in the mail all the time. I never go shopping there without at least a 20% off coupon, or knowledge that the store is running a sale, so it actually takes a while to reach the $200 limit to get a certificate, but I don't mind at all.

The interest rate on the store card, as with all store cards, is exorbitant. I've called and asked them to reduce it at least twice, and they will not budge. This is one major reason that if you have a problem with overspending using credit cards, you should not get a store card under any circumstances. The interest rate is typically 20% or more, which is just ridiculous. You could skip the coupons and deals from that particular store, use your Visa or other card, and reap rewards from it instead.

Before I settled on these three cards, which I've had for years now, I did a lot of shopping around. Look at card websites to see what kind of perks they offer; talk to friends about which cards they're using and pick the best deal for your needs. also has a list of the top four cash-back credit cards.

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