Back in the good old days of easy credit, it was common practice to have cards from all your favorite stores and two or three multi-use cards (e.g., Visa, Mastercard, Discover, etc.). It was also common to spend to the cards’ maximum limits, but only make the minimum monthly payments. We told ourselves we were building a good credit history. Then bad things happened in the US economy and wealth advisors urged us to cut up all our credit cards and pay for everything (even big ticket items like houses) with cash. Now the financial pendulum is swinging the other way again. There are several philosophies on managing credit cards. Here are three things I’ve learned.
1. Limits
The amount of credit cards you can have is limited only by the number for which you can qualify. Be aware that every time you apply for a new card, the issuer will check your credit score. If several companies do that in a short amount of time, your credit score could temporarily go down. I’m a primary and a backup kind of girl, so I have two multi-use cards and no store specific credit cards and Clark Howard approves. Which card I use depends on where I am (E.g., I have a card that rewards me for spending money on gas, groceries, and eating out).
2. Retail card
At the check out, cashiers ask me if I’m paying with their store’s credit card. When I say no, they ask if I want to open one and give me an elevator pitch of why I should: I’ll save $X on this purchase, X% on future purchases, earn points to get discounts on future purchases, and receive offers in my email. Since everyone’s situation is different, you may benefit from a store credit card. I avoid them because they make me want to spend money unnecessarily. Here’s a good pros and cons article on store credit cards.
3. Payment
There is one best practice that hasn’t changed since I started using credit. Pay the current balance in full every month. We forget credit cards are loans. The financial institution issuing the card is lending us money. If we don’t pay back the full amount we borrowed by the deadline they set, we owe them interest and finance charges. That’s how they make money and that’s why they offer a minimum payment. The longer we carry a balance, the more we owe and the more money they make.
Navigating the waters of credit card use is treacherous. It’s so tempting to buy whatever we want, but just because we can doesn’t mean we should. You work hard for what you earn so stop and think. Will you be mad at yourself every time you use that $1599 Gaggia Accademia espresso machine because you could have used that credit to pay a mechanic to fix your car that just broke down? Know your limits and stick to them. If you can’t trust yourself to be responsible, leave the credit card at home.
What’s your take on how many and what type of credit cards to have? Please share in the comments section below.