Credit cards are like the Sour Patch Kids of personal finance. One moment they’re sour and the next they’re sweet. When used irresponsibly they can lead to massive amounts of debt and even litigation.
On the other hand, when used responsibly, they can open the door to a better credit score, free money, and free travel.
It’s important to know the basics of using a credit card before signing up. If you’re entering the world of credit or looking to get more credit savvy, here’s how you can leverage credit cards to level up your money.
Why do you want a credit card?
Getting a credit card should be a strategic move. They are not for shopping sprees and they are not your primary emergency fund either. Check in with certain financial goals you have and think about how a credit card would fit into that. Do you want to buy a car within the next six months to a year but you have no credit? Getting a secured credit card and paying it off every month can build that credit score so you qualify for better financing rates. Are you planning a family vacation and want to save money on flights or hotels? A credit card offering free miles for signing up could save you money on both.
Have a specific reason in mind for the card and then look for the card that best fits those needs.
Don’t fall for every credit card promotion.
Every so often, you’ll see a particular credit card promotion make its way through personal finance and travel hacking circles. It’s usually something along the lines of a huge number of free points for signing up or a large offer for free money if you apply and get approved. Nothing wrong with these at all. I love a free $500 just for opening a credit card. But it’s not free. Those promotions usually require you to hit a certain spending threshold to qualify for those rewards.
Recently, Chase offered 100,000 “free” points that can be exchanged for miles if you open one of their VIP cards. You had to spend $4,000 in three months to get it though. Do you spend $4,000 in three months? If you’re not already tracking your expenses, you should be. Chasing these spending thresholds can get you into debt. Be aware of your spending habits before you run after certain promotions.
If you’ve unfortunately wandered into that trap and are still trying to pay down whatever balance you’ve accrued, check out this post on Nav.It for useful tips on getting out of credit card debt.
Now you might be thinking, “Well even if I don’t spend enough to get that reward it’s fine. I don’t need the reward that bad.” You also have to consider another big part of credit cards. Fees.
Credit Cards Have Fees
That will be $600.
That same Chase credit card mentioned earlier has an annual fee of $550. Some cards charge more. This fee is what you pay to have access to those awesome cash-back offers and travel points.
Are the benefits worth the yearly fee to have the card?
Ideally, find a card that has no annual fee or at least one you can comfortably afford if the perks are that good. Some people don’t mind paying $500 a year for a credit card because they travel a lot and what they can redeem in airfare is more than the fee. Great! Love to see it. But if you can’t even use half the perks, why be on the hook for a $500 annual fee?
It doesn’t stop with the annual fee either. There are fees for withdrawing cash on your card, for balance transfers (when you transfer a balance from one credit card to another that has a lower interest rate), late payments, replacing your card if it’s lost or stolen and fees for using the card abroad. All can be different between card issuers.
The interest rate is not the priority.
Can you believe I just said that? I know. So controversial. What I mean, actually, is that it shouldn’t be the first or only thing you look at because you will not be leaving a balance every month. No, seriously, you will not. That is how you get charged to use money and we do not do that here. That balance should be paid off IN FULL every month. Do it every week if you need to or after every purchase. If you don’t have the money in your bank account to pay off your purchases you do not need to be buying the things.
That’s not to say the interest rate isn’t important. According to WalletHub, anything lower than 14% APR (annual percentage rate aka what you pay in interest) is ideal. If you’re considering doing a balance transfer, you want to for sure look at interest rates to make sure wherever you’re transferring your debt to has a lower rate than the card you currently have the balance on.
Because interest rates are based on your credit score you might get a 0% APR for the first year, you might get 36% or you might get something in between. That is why we will be paying off the balance in full every billing cycle.
Can’t get access to credit to save your life?
When I wanted to start building my credit, I applied for everything and was denied for everything. Even a Victoria’s Secret card and they will accept anyone! I just assumed anyone could get a credit card. No. Everyone does not get approved for a credit card just because they apply. The rejection letters all stated the same things. I had no long-term credit history. I didn’t have enough income. My credit score was too low. Well, then how do I build my credit if y’all won’t even give me any?
Enter the secured credit card.
A secured card is one that you put a deposit down on and that deposit is your starting credit limit. The deposit is the issuers’ insurance that if you don’t pay, they still get their money. Remember, the card issuer sees those factors I listed before as a liability. Doesn’t matter if your rent and bills get paid on time every month.
NerdWallet has a great breakdown of the best cards and their benefits and I highly suggest looking it over. I personally started with the Discover It Secured Credit Card. No affiliation, I just really like the card and it was an easy process to go through. This card has no annual fee, was $200 to open, they do automatic account reviews and refund deposits or expand credit limits without you having to call and ask, and it gives great cashback rewards which is not typical for a secured card. Again, not the case for every card.
If you have no credit, are low income, or are trying to rebuild credit, you already know that sometimes you have to pay to play. It might seem weird to have to put a deposit on a credit card, but sometimes that’s the only way to build a credit history so you can get better credit options later in life.
Do you meet the criteria to be approved for a credit card?
Your income and credit score aren’t the only things that affect your ability to get approved for a credit card. They also look at payment history, if you have previous bankruptcies, types of credit you have, how long you’ve had some of your other accounts and some will even look at how many credit accounts you’ve applied to within a certain time frame. Chase Bank has their notorious 5/24 rule meaning if you’ve opened more than 5 credit accounts in 24 months, it’s an automatic rejection regardless of your income or credit score.
It’s important to do some research and check criteria before applying so you’re not putting unnecessary hard credit pulls on your history.
Be well versed in card issuers’ Terms of Service.
You can be sued for non-payment of credit cards.
You can be SUED for NON-PAYMENT of credit cards.
Protect yourself and learn the in’s and out’s of the cards TOS before you put in that application. Some things to look at are:
What dates does the billing cycle run through? It’s not always the 1st through the 30th or 31st.
What are the preferred payment methods?
How long do you have before late fees are charged?
What is the fee for balance transfers?
How can cash-back be redeemed?
What qualifies for cashback?
Maintain good credit card habits.
Regardless of why you got the card, once you have it, you need to be an extra responsible adult with it. A few ways you can do this is:
Pay off your balance every week instead of waiting for the end of your billing cycle. Smaller amounts are easier to pay than one big one.
Set up automatic payments after every auto-bill pay. For example, I have my phone bill set up for auto-pay from my credit card. Then, I set up automatic bill pay from my bank account to my credit card for the day after. The bill is posted for less than 24 hours, then it gets paid, and I don’t even have to remind myself to do it.
Use it for purchases that were already in the budget. Next week I have to take my car in for its 60,000-mile service. It’s going to be about $500 and I already have that set aside in my Car Maintenance sinking fund. Chase happened to be offering $200 cash back for opening a Freedom Flex card after spending $500 in three months. So I opened one because I’ll immediately hit that requirement and pay it off right away while netting myself $200 for something I was going to need to do regardless. If it was already in the budget, you may as well get some cash back for it.
Set up balance alerts. If you only want to spend $200 on your credit card this week, set an alert up for either that amount or increments within that amount so you lessen the risk of overspending.
Optimize your cashback. There is no better feeling than making money for doing something you were already going to do. Cashback is that feeling. If you get 3% cashback at gas stations with your card, start using that card when you get gas. If you have a card that gets you 5% back when you shop at Walmart and you already shop there for groceries, use that card! I keep a sticky note on my cards of what current rewards are and where they’re offered. This way when I go to pay, I have my own little cheat sheet to make sure I’m optimizing my spending. However, don’t shop somewhere just because they offer cash back.
Negotiate your interest rate. If you’ve had your card for six months or more, you can start considering negotiating your interest rate. This is especially helpful if you’ve been carrying a balance. It does however mean you have to call them, which is the worst, I know. But if a 5-minute phone call will save you some money, it’s well worth it.
Use your credit cards for good.
Remember, credit cards can be used to help you get better rates on anything in life you might need to finance. A credit history that shows on-time payments with responsible usage can mean the difference between paying one months rent as a deposit on an apartment or not. It can help facilitate getting a better rate on financing a car, which could save literally thousands of dollars. It can also increase your access to wealth generating opportunities that, guess what, you might have to finance. As much as playing the credit game sucks, it’s not going anywhere any time soon. With a little research and mindful usage, you can leverage the game to open up doors to other wealth-building tools.