- Spend within your means. One of the best pieces of financial guidance that my parents drilled into my head from a young age was this: never put anything on a credit card that you don’t already have money in the bank to pay for. Credit cards are highly flexible unsecured loans, and as such their interest rates are absolutely brutal. Interest charges add up and can quickly negate the value of any rewards you obtain from using the card; additionally, the fine print for many cards stipulates that your rewards are forfeit if you miss a payment. To avoid paying any interest charges or losing rewards, pay your credit card bill on time and in full each month.
- Avoid maxing out your cards. Credit utilization is one of the determinants that goes into your credit score. It refers to the percentage of available credit that you’re using at a given time. High credit utilization can give lenders the impression that your finances are stretched to their limit, adversely affecting your credit score even if you’re paying your bills on time. To keep your credit utilization down, avoid maxing cards out. Consider paying down the balance on your card at various points throughout the month rather than waiting to receive your bill. Additionally, you may want to keep an unused, no fee card open just to increase your available credit and decrease the percentage of credit you’re utilizing.
- Don't spread yourself too thin. Each and every credit card application results in a hard inquiry on your credit report. Applying for too many cards (or other loans) in a short period of time can make lenders think you’re either in dire financial straits or making poor financial decisions. Either way, the result is a hit to your credit score. Lenders typically care about hard inquiries for a period of two years, so bear that in mind as you apply for loans.
- Monitor your accounts and review transactions frequently. Many credit cards offer transaction alerts to provide email, text, and/or push notifications whenever the card is used. There's no substitute, though, for periodically reviewing transactions and investigating any that are unrecognized or otherwise suspicious. Be sure to go through your statement line by line each month to make sure no unauthorized activity has shown up on your card. If you suspect your card has been lost or stolen, report it to the issuer immediately.
Choosing and Using Your Credit Cards
Now for the fun part of this post: rewards, perks, and other benefits! Credit card rewards programs are diverse, and your choice of card can either provide tremendous value or leave a lot of money on the table. Numerous factors should go into your decision of which credit card to apply for, including any annual fees, sign-up bonuses, types and rates of rewards, periodic offers, and extra benefits like purchase protection and travel insurance. Start by reviewing your budget over the past several months or so (and if you don’t have one yet, start by reviewing my budgeting post from a couple years ago!) to identify your spending habits and the categories where you spend a considerable amount of money. This can point you toward cards whose rewards programs align with your lifestyle. For example, the American Express Gold card offers 4x points on purchases made at supermarkets in the US and restaurants around the world, making it a great card for people with large grocery and dining bills. The American Express Platinum card, on the other hand, offers 5x points on airfare and hotels and offers great additional perks to those who travel extensively. Before choosing a card with an annual fee, make sure your purchasing patterns will provide rewards that exceed the card’s cost. As attractive as a card’s perks may be, they aren’t worth it if you have to significantly alter your lifestyle to take advantage of them. A credit card should be a financial tool offering convenience and rewards, not a vehicle to facilitate runaway spending!
As you choose and then use the card you’ve selected, keep the following tips in mind to maximize your rewards and stay financially healthy.
- Purge your wallet periodically. Take a look at the credit cards you currently own and determine whether any should be closed. If you no longer use a card enough to justify its fee, get rid of it and choose something else that fits your lifestyle better. Often, you can call your card issuer and ask for a product change to another card in their portfolio. This can help you get a different card without a hard inquiry on your credit. The downside of this is that you generally won’t be eligible for the sign-up bonus that otherwise might apply to your new card.
On the other hand, if you have old unused cards with no annual fee, consider keeping them for the reason explained above: they increase your available credit and decrease your credit utilization, making you look better to lenders.
- Make credit card companies earn your business. At the end of the day, you're a credit card issuer’s customer, and customers need to be courted. If you’ve got a card that you’re on the fence about keeping, call the issuer and ask if they have a retention offer. They often do in the form of reduced fees, statement credits, or bonus points. Be careful, though! Retention bonuses often come with minimum spending requirements in a specified period of time in order to be received, so be sure to review the terms carefully before accepting one.
- Choose new cards strategically.New cardholder bonuses generally come with a preset spending requirement. By timing your application to open a new credit card shortly before a major purchase or high expenditure period, you can increase your likelihood of meeting the spending threshold and receiving a lucrative reward.
Another strategy is to pair cards that have high rewards rates on different spending categories. One example is the American Express Platinum and Gold cards, as discussed above. An additional benefit of pairing these two cards is that rewards points pool in the same account, allowing you to maximize your rewards without having to transfer and possibly convert points between programs. Chase’s Sapphire Preferred and Freedom cards also allow you to pool points in this way.
- Increase savings by using card offers. Many cards provide periodic, limited time offers that allow you to get extra rewards points or statement credits on purchases from selected vendors. These offers generally aren’t automatic and must be added to your card manually, but there’s no penalty for adding one and not using it. Be sure to peruse the featured offers regularly!
Card vendors usually limit the number of offers available to your card at any given time. American Express Platinum cardholders, for example, can see up to 100 available offers at a given time. But those aren’t all the offers Amex has negotiated! If a cardholder knows Amex has a specific offer that’s not listed for their card, they can add any number of offers, log out of the website, and then log back in. When they do so, the list repopulates to show 100 available offers. If you decide to use this strategy, however, please be courteous. Card issuers limit the number of cardholders who can enroll in a given offer. Avoid adding an inordinate number of offers that you have no intention of using and preferentially select offers that will expire in the near future.
- Know how much your points are worth. Points (or miles, in certain programs) are a form of currency and should be thought of in such terms. With my old Visa card, each point was worth 1¢ regardless of how it was redeemed. Cash deposit in my checking account? 1¢. Amazon gift card? 1¢. Conversion to airline miles? 1¢. But it’s not always that way. American Express points, for example, have different values depending on how they’re redeemed. Points have a value of about 0.6¢ each when redeemed for a statement credit. If you shop on Amazon and use points to pay for your purchase, though, they’re worth about 0.7¢ a piece. And if you use them to book travel, they’re worth 1¢ each. Any time you’re going to redeem your points, ask yourself whether you’re getting a good deal.
- Err on the side of flexibility. You may be tempted to apply for a credit card that’s co-branded with an airline, hotel chains, or other business that you frequently use. While this can net you some pretty good rewards, it should only be done after careful consideration. These co-branded cards typically lock you into that business’s rewards system, giving you points that are hard or impossible to redeem elsewhere. It may be better – and more financially beneficial – to focus on cards that provide general rewards since their points can be redeemed for a wider range of products and services. Points from these cards can also frequently be transferred to other companies, too.
- Keep track of your rewards. Know what’s more fun than earning a bazillion rewards points? Redeeming them. But it’s hard to do that when you don’t know how many points you have and how much the things you want cost. It’s important to keep track of the points you’ve earned through various loyalty programs and know how those points convert between different loyalty programs. Credit card rewards points can often be transferred to airlines and hotel chains, which means you can combine them with points you already have with those companies to pay for better fares and stays.
Rewards points earned on credit cards generally don't expire as long as the card remains active, but the same cannot be said of points and miles in various hotel and airline loyalty programs. Miles with Delta and United never expire, for example, while those with American Airlines expire after two years unless you earn, redeem, or purchase additional miles. Use a spreadsheet or an app to keep track of the points you have in various loyalty programs and when they expire. AwardWallet and CardPointers are two of the more popular apps used for this.
- Think outside the box. The path of least resistance isn’t always the best one. Just as points may have different monetary values when redeemed for different products and services, their practical values may differ between various companies within the same sector. Most airlines are members of an airline alliance partner program, for example. By doing a little extra research, you can often book travel through an airline’s alliance partner and get a cheaper rate than by booking through the main airline itself.
The bottom line: Credit cards offer terrific convenience and, when used appropriately, are powerful financial tools that can increase your purchasing power and creditworthiness. When coupled with a well-researched and intentionally selected rewards program, they can also decrease the cost of various regular purchases and provide fantastic bonuses and other perks. Take the time and put in the work to select the card that’s right for you and you can see immediate and sustained benefits!