How To Use Credit Cards Wisely

Credit cards often get a bad rap due to their high interest rates and some people’s tendency to rack up thousands of dollars in credit card debt. However, if you use them properly, they can actually be a very useful tool. Renting a car, booking flights and ordering online are all things that would not be possible without a credit card. Here are some guidelines for making wise decisions about your credit card use.

Always pay off your balance in full. This is the number one rule of using a credit card and means that you should not be buying more than you can afford. Just because you have access to funds through your credit card, that doesn’t meant that you have the cash to cover it and not paying off your balance each month means that you’ll start incurring interest charges on any balance you carry. A good rule is to not charge anything you wouldn’t otherwise buy with cash. If you can’t pay in full one month because of an emergency, at the very least, you must pay the minimum and should definitely aim for more than that.

Consolidate your debt to pay it off on time. Credit card debts can spiral out of control if you don’t follow rule #1 above. If it does, and there is no way that you are going to pay off this debt in full, consider consolidating your debt.

Pay on time. Paying your credit card company on time is a must! The company will report any late payments to the credit bureaus which could hurt your credit score and put your ability to borrow in the future at risk or make that borrowing more expensive through higher interest rates.

Watch your APR. If you cannot pay your balance in full, the most important thing you should be looking for in a credit card is a low APR. This means you won’t pay as much to your credit card company in interest each month. Forget rewards if you are not paying your balance in full because the money you are spending on interest will outweigh any benefit you get from rewards.

Take advantage of rewards. If you find a credit card that offers good rewards that you are likely to use and are paying your bill in full each month, there’s nothing wrong with taking advantage of a good rewards card. They can be a great way to earn free flights, hotel rooms or cash back. However, if your rewards card carries an annual fee, just make sure that you are making enough back on the rewards to justify the fee.

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Don’t Fall Into A Spiral Of Debt

Paying high interest on credit cards is never a good strategy to building wealth and achieving positive personal finance goals.  What is a high rate?  These days, 25% is probably considered high.

If you find yourself in a high interest situation, hopefully you are trying to do something about it.  Some people continue paying on the debt, hopefully whittling away the debt.  Others try to take advantage of balance transfers for lower rate cards.

Regardless of your intent, getting out from underneath a high interest loan is key, because any dollar paid in interest is a dollar you no longer have.  Reducing those dollars spent will help put them in your pocket instead.

One of the things that can come up that can really throw a monkey wrench in getting away from high interest credit cards is a situation in which you may not be able to pay even your minimum payment.  This can have a long lasting effect on your credit as a late payment can cause your rates to go up even further and could add additional late fees to your account.  In certain cases, say if your paycheck is coming a day or two later, it could make sense to look at a short term loan.

Keep in mind timing.  Paying the loan off in a couple of days is costly, but can sometimes be less costly than a late fee.

If you do have to go this route, there are two key takeaways.  First, it must be a one time thing.  Getting into a habit of using these loans will cost you more and more each time, leaving you with less of your income available to pay your credit cards and other bills.  The goal is more money in your pocket, not less.  Second, you must start to build a cushion so that you don’t get in this situation again.  Even putting $5-10 of each paycheck aside will slowly start building a small savings, so that in the future, you could tap into that rather than turning to an outside provider that will be happy to charge you.

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Our Next Credit Card

Last week I posted that I was looking for a good credit card which offers cash rewards specifically to improve upon the 1% we get for gas purchases on our current Citi Dividends card.

Two stuck out as the favorites, the Pen Fed card (which is for military based people but you can get around that pretty easily) or the Costco American Express True Rewards card.

My dad and a good friend ended up backing the Costco card pretty strongly, and the fact that we’re Costco members means that there’s no charge, so I’m pretty sure that’s what we’re going to get.

Basically, the card offers 3% on gas purchases, 2% on other categories (I think eating out is one) and 1% on everything else.

I did some research and it looks like they’ve had this for awhile, so while there are no guarantees, the fact that these payouts are in place seems to bode well for the long term viability of these percentages.

It’s not a straight cash rewards program. They send you a reward certificate once per year that you have to redeem in the store.  You can either get cash there or get a Costco gift card.  Since we do a once-per-month Costco trip, this should work out just as easily as cash.  We can just use the gift card that we get to pay for our purchases, and take that budgeted amount and funnel it into the earmarked portion of our savings account which we use for rewards.  Easy as pie.

My wife is nervous about adding one more card to the mix.  I don’t think we’re too card crazy, so while this is another thing to keep track of, I think the extra bucks we’ll get in reward money will make it worth the hassle, especially since we’ll be consuming a lot more gas given the camper purchase we just did over the fall.

What do you think?  Are we making a good choice? Am I putting too much effort into what will likely amount to a few bucks difference per month?

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I Got A Citi Dividend American Express Card Without Asking For One (But It’s OK!)

I saw a post a few weeks ago on Consumerism Commentary where Flexo got a credit card that he didn’t ask for and really wasn’t all that happy about it.   When Citi sent a replacement credit card for his Dividend MasterCard, they also sent an American Express card.

I read the story with interest, because both my wife and I hold Dividend MasterCards and use them as our primary credit cards, turning down other cards in favor of the cash back that our Dividends card gives us. Most of Flexo’s readers that left comments were similarly put off by getting a card ‘forced’ without asking.

So, when my replacement card came in the mail last week, I looked inside, and also found two cards.  My MasterCard had the same account number, just with a new expiration date.  The American Express card was right there as well.
All credit cards good here

I sat down and read some of the questions on the FAQ sheet attached.  Here’s a brief rundown:

  • You can’t activate just one card without the other (hmmm…not good so far)
  • It only shows up as one account on your credit card (OK, that’s not so bad)
  • For the first twelve months, you get an extra 0.2% cash back when you use the AmEx card over the Master Card, so for purchases where you would get 1%, you get 1.2% and on their rotating special categories you could get up to 5.2%. (Not a huge improvement but a few extra bucks in my pocket is a few extra bucks in MY pocket, OK)
  • Everything shows up on one billing statement and transaction list.  No need to log in to two accounts or pay two bills or anything like that.

I wasn’t too bothered by all this and was sort of neutral by the whole thing, so I decided to activate the card.  I’ve had the card since 2004, have never paid a lick of interest, and have gotten cash back in the four figures, so I was OK with it.  During my call, though, I actually realized this could be a good thing for me.

The automated schpeel was going through the ‘benefits’ of the additional card, notably that you got the extra 0.2%, when they also mentioned “and you can use it at merchants everywhere like,, and Costco.”

Wait a minute, did she just say Costco?

Yep.  She did.

Costco only accepts cash, debit cards, or American Express payments.  We don’t do much in the way of cash for most of our spending.  We only want and have one credit card each (the Citi Dividends card), so we never went with an American Express.  This meant that our Costco purchases get made using our debit card.

This worked, but our days of getting any rewards for using our debit card are long gone.  But, with the new AmEx card add-on, I can swipe it at Costco and get cash back!  Now, our Costco spending isn’t astronomical so this isn’t going to make us rich, but it will definitely add some extra cash back in our pockets, and every little bit of that helps, right?

Now, I know there are other cards that give you better rewards at Costco.  I get that.  But, I try to keep a minimum number of credit cards for the sake of convenience and for keeping my credit score pristine.  Now, I can get some cash back and not have any additional payments to make or any additional credit lines showing on my credit report.

I’m more than good with that.

Have you heard of having one credit card with two different providers?  Are you in Flexo’s court where you think this is a bad idea or am I onto something by being OK with this?

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