How to optimize credit card use

How to optimize credit card use

In the personal finance blogosphere you’ll hear all kinds of views about credit cards.

Don’t own them at all.

Own them but only do this.

Hack credit cards for rewards and points!

For example, if you’ve been under the impression that credit cards are a sound source of emergency cash, I would suggest you think again.  Only fools with tools believe that…

Aside from swiping the card each time you make a transaction, you should know that with good credit card habits you can actually make very good use of your credit.  There are many factors that go into your credit score – all the elements that make up a good credit score are listed here.

(Note:  last time I checked my credit score it was approaching 850.  You?)

If you spend any time on blogs or reading various personal finance articles, seasoned plastic holders will reveal they have a system in place to build rewards and/or get cash back and/or get deals on travel while avoiding huge interest charges.

On that note, here are my top tips to help optimize credit card use.

1. Pay off the balance

This is priority #1. Always.

When the credit card bill arrives each month, you should strive to clear the balance in full – full stop!  Should you be in the predicament that you’re somehow falling short this month, definitely pay more than the minimum payment amount AND as close as you possibly can to your full balance.  This way, even if you have one monthly blip on your radar, you will avoid steep interest costs.

2. Find a credit card that matches your spending

Are you a modest spender on gas and groceries?  

Do you dine out a great deal?

Find a credit card that matches your spending.

Personally, we use a cash back card that earns us 4% cash back on gas & groceries; 2% cash back on drug store purchases, and 2% on recurring bill payments. If that wasn’t good enough, I also earn 1% cash back on everything else.

A cash back card makes sense for us right now based on our budget below:

• Groceries for two adults = $600 per month
• Gas for *two cars = $200 per month *soon to be one since we are moving into a condo very soon; one car only later this month.
• Cat food (not for us!) and cat care for two special feline friends = up to $200 per month
• Dining out = $100 per month
• Beer, wine and spirits = $100 per month
• …and the list goes on.

In the last ~7 months, we’ve earned $270 cash back and I suspect we’ll be close to earning $450 by the end of the year.

Before owning any given credit card, do some research and find a card that aligns with your spending patterns.  Fans of this site at RateHub have provided me a widget where you and I can compare various credit cards – check out that widget in the bottom-right hand page of my site.  It’s free to use!

3. Split your spending between multiple cards

Never discount the power of a companion or family card. If you wish to take full advantage of cash back or rewards programs offered by various credit card companies, consider owning multiple cards for the same account.

Charge your spending (as a couple) to the same account and the spending tally is consolidated; not to mention accelerated towards your applicable rewards.  (Again, regardless if you hold one or two or three household cards make sure you can clear the bills each month because companies that offer you rewards may also charge a high rate of interest on unpaid balances.)

And, even with the perks that come with multiple credit cards under one account be very cautious about having too many cards in your wallet at all.  Too many credit cards in your hand may entice you to chase rewards – putting you down a path of spending more than you earn.  That’s never a good idea.

Keep only a few of credit cards at any one time – at the most. One for daily, everyday purchases; one for travel, and (maybe) yet another for online purchases.  You don’t need more than three cards at any one time.

4. Avoid cash advances with the credit card

Credit cards can be better than cash, they are absolutely great for making purchases, but you may want to refrain from using them to withdraw cash.

5. Seriously weigh any pros and cons with debt consolidation

Using a no-interest credit card to consolidate your debt may seem like a great idea. However, know that you’ll likely pay a small percentage charge for the balance transfer in doing so.  Also, the 0% APR (annual percentage rate) interval may only last for a particular introductory period.  So, my advice to you is to read the credit card fine print.

6. Ask / apply for lowered interest rates

If you can establish a good relationship with your credit card provider, namely, just pay your bills on time (!), you might be able to get them to lower the interest rate on your card.  Credit card companies are usually very keen on maintaining the accounts of members with a good spending and repayment history.

7. Curb the temptation to spend more than you can afford

A healthy limit on your credit card is fine (I recall we have $10,000 on ours) but that doesn’t mean you should be spending to it.

Avoid the temptation of spending money on things you don’t really need with money you don’t really have.  Save and spend with a purpose that aligns with your values and what you really care about.

Summary

Whether it’s a credit card for points, miles, and/or cash rewards, do some research and ensure you have a plan for plastic. Credit cards can be very convenient but with the wrong behaviours very costly.

Do you ever comparison shop for credit cards or other financial products?  If so, what do you look for in a credit card?