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.
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?
My wife and I were looking at buying a rental property last year. At that time my RBC mortgage manager told me my score was 900. We paid off our mortgage last March so it is probably lower now. I would rather be mortgage free than have a super high score anyway.
I hear ya about being mortgage free Carl. I hear life begins when you’re debt free!
Hi Mark; I’ve made it a practice to pay my credit amount right away. That is I don’t wait for the monthly statement – if I purchase something with my credit card today, then odds are I’ll pay it off tonight or tomorrow. Using Simplii as my chequing account I don’t pay any transaction fees and I have found with interest rates and the short monthly statement periods there really isn’t any advantage re the time value of money waiting to make payment. Makes my budgeting easier as well.
Smart stuff Rich. Funny enough, as soon as the middle of the month arrives (e.g, this past June), I check my online balance and pay off my debt – pronto.
We use Simplii as our chequing account as well – avoid transaction fees – and do everything online. It’s pretty good eh?
Thanks for being a fan.
Good post. I hope those needing the advice most are actually reading and heeding.
I agree with Cannew on making cc full payment automatic. I think I’ve done that for 25 years or so when I learned you could set that up.
fbgcai, in my case the 2 are very close. Last time I looked 3 or 4 mths ago my Equifax was 857 and TransUnion 859 so pretty similar. First time I ever checked my score was maybe 2 years ago when Mark had another post on this and Borrowell sponsor. TransUnion is linked accessible through my bank.
Only have 1 Canadian credit card, and no debt for over 25 years now so not sure how I could get my score higher, but does it really matter? We seem to be able to do what we need to do.
Anything over 800 or so (credit score) is excellent and hard to beat anything in the range of 860 really based on their formula I recall.
I expect nothing less from you! 🙂 Well done.
Thanks. Same to you. I also expect nothing less from you!
Seems lots on here are in same ballpark. Responsible savers and investors!
Wishing you the very best with the move and the new digs.
We’re jetting off this coming weekend and my home renos are nearly done. Draining down our income and pile!!! I’ve got a pile of outdoor work waiting when I return. All good.
You have enough income to drain 🙂 Move starts tomorrow and through the weekend. Thanks for the wishes! Will send you a pic of the new digs.
All good. You’re welcome. Look forward to that.
Thanks Mark and Rbull for your responses – I’m guessing as you suggested, the two agencies view/evaluate different debt types differently – I hold both credit card and line of credit debt (for investment! – NOT for consumption 🙂 ) – all the debt is serviced 100% – btw my numbers are Borrowell – 843 and CK – 867
Great work! Anything in the mid-800s for a credit score is great!
I don’t care anout my credit score, because I don’t need any more credit.
But when my bank offered it for free and easily, I checked my score. It is very high, but I lost points because I had paid off my mortgage! I found that kinda funny. It was quite a bit higher than 860.
Ya, the credit score folks like you to have debt actually since it increases your utilization ratio. 🙂 Long term I’m more than happy if my credit score goes under 850 but I’m debt-free!
I never understand the idea of using cash only. If you pay off credit card balance in full each month, you might as well take advantage of the credit card rewards.
Yes, but I think folks who tout credit card deals everywhere need to be mindful that it’s the folks that often can’t pay off their balances that are subsidizing the “advantage of the credit card rewards”. Nothing is free 🙂
Good post – I think points 1,4 and 7 are the biggies with # 1 by far the most important – in multiple decades of credit card use I have yet to pay any interest.
good on you for the 850 credit score!
Do perhaps know why the numbers (scale) differ between Equifax (Borrowell) and Trans Union (Credit Karma) ?
My scores are mid 800s in both but there’s a 25 point difference between the two – Equifax is lower.
Potentially they calculate the ratios of debt owed, repayments, etc. slightly differently? I thought that was pretty standard but I would need to double-check. I think using Borrowell I was about 847 recently but I don’t really monitor it that closely.
Heard on the Dave Ramsey show that, mainly due to impulsive purchases, people spend 17% more using a credit card as opposed to paying with cash. I don’t think even the best rewards card can make up the difference.
I would agree. And with Apple Pay and other, it’s making it even easier for folks to ignore any restraint. The behavioural psychologists know this when working on these apps 🙂
I think it’s interesting to note that if you do not pay off the credit card balance in full, you still pay the interest amount regardless of how much you pay off. So even if you pay the full amount less $1 by the due date, you still pay the full interest. I found this out the hard way a long time ago…
Great reminder Peter for newbies with credit cards. Paying off the balance, in full, means you pay no interest. Paying more than the minimum, or even less $0.05 you’ll still be charged interest. Every bit counts to those companies!
Sound advice, you just missed “have the monthly payment made automatically out of your chequing account”!!! and if you can’t meet the monthly payments, stop using the card(s).
Ha. Fair point. I hope I was clear you need to make the payment – in full – always.