The rules and myths of credit cards

Last week, I talked about two strategies to use credit cards as a little boost on the road to financial independence. The “stop bothering me about this” strategy utilized a simple, one-card approach. The Citi Double Cash card gives you 2% back on all purchases with no annual fee. No frills, super simple, free money.

The slightly more involved approach was the Chase Trifecta. The Sapphire Reserve gives you an effective >4.5% back on dining and travel for an annual fee that’s effectively $150, along with numerous other perks. The Chase Freedom gives you an effective >7.5% back (when combined with the Reserve) on rotating categories each quarter, with no annual fee. And the Chase Freedom Unlimited gives you an effective >2.25% back on all other purchases with no annual fee. All three cards have solid to amazing sign up bonuses.

Today, we take a look at some credit card do’s and don’t’s to help you navigate the exciting world of plastic (or metal, in the case of the Sapphire Reserve):

1. Do not EVER carry credit card debt.

In my book (err, blog), there’s only one hard and fast RULE of credit cards: no debt. In fact, every time you open a new credit card you should set up automatic payments to cover the full balance of your monthly statement. DO NOT just pay the minimum amount due. You’ll be charged interest on the remainder, which is obscenely high and will quickly negate any benefits that you might be getting from your card. And it’ll ruin your life. Seriously–do not do this. If you’re currently doing it, stop. Pay off your credit card debt and never go into credit card debt again.

2. Occasionally scroll through your recent transactions.

It’s easy to just be on autopilot when you have automatic payments set up and never check your cards. But, for security reasons, it’s good to just quickly scroll through your transactions every several days. I have 6 credit cards (more on this below) and the process of logging in, scrolling through, and logging out literally takes less than 5 minutes total. It’s not difficult. If you see anything suspicious, call the number on the back of your card right away and they’ll help you sort it out.

3. It’s OK to have lots of credit cards!

You are a responsible adult. You know how to play Offense and Defense and optimize your taxes and even clean your computer. Now you know the rules of credit cards. If it makes sense to get a card, go ahead! Contrary to popular belief, your credit score will not plummet. The inquiry (part of the application process) may result in a temporary decrease, but the long term reduction in your credit utlization–the percentage of your total credit that you’re currently using–will ultimately result in a higher credit score. If you’re worried about all the time it takes to “manage” all your cards, just go back and read points 1 and 2–it doesn’t take much time.

If you’re not afraid of doing this and really want to optimize your credit card game, here’s what I recommend. First, get the Chase Trifecta. That is the cornerstone. Then add on additional cards to increase cash back or points in  your often-used areas of spending. For example, if you shop at Costco (typically a good financial decision if you have one nearby and use your brain while you’re there) then you should definitely get the Costco Visa Anywhere card. The annual fee is simply your Costco membership, and the card gives you 4% back on gas (including at Costco). For grocery shopping when grocery stores are not in the current Chase Freedom bonus category, I use the American Express Blue Cash Everyday card–no annual fee and 3% back on groceries. And in fact, I’ll even take this one step further…

4. If you open a credit card just for the sign up bonus, you will not melt or explode!

In fact, sometimes this can be very helpful. If you’ve already got the Chase Trifecta sign up bonuses and you’re expecting to be flying around the country for unpaid job interviews (I’m looking at you, med students), it might make sense to apply for a Southwest credit card for their 40,000 or occasional 50k or 60k point sign up bonuses. Each point is worth roughly 1.5 cents each, so if you can get the card during a 60k point promotion that’s about $900 in value, which is a nice chunk of free money. Additionally, certain hotel credit cards may offer significant sign up bonuses and anniversary free nights or point bonuses that can more than offset an annual fee. Just make sure you read and understand the card benefits and any spending requirements before you apply for a card, which brings me to my last point.

5. This is not a license to spend!!!

The moment you use a credit card to buy junk you don’t need, you’ve lost the credit card game. Credit cards are tools to give you some free money, not debt-accruing machines or an excuse to waste money for a few travel points. We simply use credit cards to buy the things we need to buy, because we might as well get free money while we’re at it. To that end, I also recommend spacing out when you apply for credit cards. There is typically a spending requirement in the first few months to get the sign up bonus. The last thing you want is to be in multiple spending requirement periods at once. Spacing out applying for new cards will also smooth out any negative effects on your credit score. Additionally, Chase only let’s you apply for a new card if you’ve opened less than 5 cards in the last 2 years (aka the 5/24 rule). This is a long term game–be patient, and don’t spend unnecessarily!

 

The above should cover all the basics. If there’s anything you’d like to hear more about, let us know in the comments!

2 response to "The rules and myths of credit cards"

  1. By: Beshoi Beshay Posted: July 7, 2018

    Nice post! One criticism I hear of using credit cards (or even debit cards too often), rather than cash, is that it doesn’t register in your mind that you’re spending money the same way it does when you hand someone cash. So the credit card critics say that although there might be a lot of rewards and free cash that go along with credit cards, you’ll end up spending a lot more money each month then you would’ve with no credit card (since it doesn’t “feel” like you’re spending a lot of money), and this thus negates the benefits of credit cards. What are your thought regarding these criticisms?

    • By: Joey Posted: July 7, 2018

      Beshoi, thanks for the comment! The mental game is definitely interesting. For me, it’s actually the opposite. When I pay with cash, the next time I log in and look at my checking account, nothing’s changed. If I pay with a credit card, my bill gets bigger, and eventually the amount of money in my checking account decreases. Either way though, I think we should simply approaching spending differently, regardless of the medium of exchange. For every potential purchase think: “Do I need this?”, “Is buying this worth a little (or a lot, if it’s a big purchase) more time as a slave to my income?”, and “Is buying this worth the opportunity cost of doing something else that’s really awesome with my money like saving the world, for example?”. If we approach each purchase like this, I think we’ll be much more likely to control our spending whether we’re paying by cash or card. And if it’s all the same, we might as well get some free money while we’re at it!

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