Thanks to credit cards, paying for goods and services has been reduced to a mere tap of a card or cell phone. This ease and convenience lead to a range of outcomes though, with some credit card users benefiting from free cash back and rewards while others suffer under revolving credit card balances at crushing interest rates. For those in the latter camp, we recommend reading our blog post and other resources on dealing with debt. For credit card users who are just starting out or who have little to no revolving credit card debt: how do you stay on the winning end of the credit card game? We offer four key tips below.
Pay off your balance in full and on time every month. With the recent rise in interest rates, the average rate on credit card balances is over 24% APR (annual percentage rate). In other words, the price that consumers pay for carrying a balance on credit cards is now even more exorbitant than the already exorbitant rates of years past. If, however, you pay off your credit card balances in full and on time every month, you essentially benefit from a month-long, interest-free loan from the credit card company, not to mention the convenience of paying by card instead of cash. This discipline can also help your credit score. Of the 5 factors that determine your credit score, the two biggest factors are payment history and amount owed. Making regular on-time payments boosts your “payment history” score, while paying off balances entirely each month can improve your score for “amount owed” because you are utilizing a lower percentage of the overall credit amount for which you have been approved.
Open a credit card early and keep it forever. Another factor that determines your credit score is length of credit history. This includes how long you have had any credit accounts open, how long you have had your current credit accounts open, and how long it has been since you used your current credit accounts. Contrary to popular belief, the total number of credit cards you have does not directly impact your credit score. However, opening new cards can indirectly impact your score by reducing your average length of credit history. Thus, keeping credit cards open long-term (even if you only use the oldest ones sporadically) will help maintain a high credit score even as you pursue Tip #3 below.
Look for opportunities to strategically add cards with exceptional rewards. The final and potentially most lucrative element of playing the credit card game well is the rewards. The majority of credit cards offer rewards in the form of either cash back or travel points, and choosing which type of rewards are more valuable to your unique situation is the first decision you need to make when looking at new potential cards.
Many cards, especially cash back cards, do not have any annual fees. (Thus, if you never pay interest or late fees on the card, you get free money by using it!) Some of the most competitive no-annual-fee cards at the moment include the Wells Fargo Active Cash Card, the Chase Freedom Flex , and the Capital One SavorOne Rewards Card, among others.
Depending on your level and type of spending though, it may be advantageous to pay an annual fee for a card because the rewards far outweigh the cost. This can be particularly true when it comes to travel cards, which typically offer benefits that exceed the cost of any annual fees, as long as you make full use of them. For instance, PFS credit guru Drew would argue that the Capital One Venture X Card is the best travel card available right now. The sign-up bonus provides a substantial short-term benefit for opening the card, but the card is worth keeping long-term provided you plan to do some level of travel each year. In that case, the $300 annual travel credit and the 10k annual bonus points basically pay for the annual $395 fee, and then you receive significant rewards for using the card on top of that, especially for travel booked through Capital One’s site.
If the large annual fee for the Venture X Card seems intimidating, another compelling option is the Chase Sapphire Preferred Card. The annual fee is only $95 per year, but it offers a similarly significant sign-up bonus and generous rewards if you use the card for travel, dining out, or online grocery purchases. Both Capital One and Chase have numerous travel partners with whom you can transfer rewards points, which is often the best way to maximize your points.
In addition, American Express has some competitive options depending on your needs and spending habits, and specific airline and hotel cards could be advantageous if you regularly use a certain brand for travel.
Reevaluate your credit card choices regularly, especially those with annual fees. Taking time to consider your lifestyle and how much you spend in different categories of expenses is an important step in figuring out which card(s) might be most beneficial. Also consider if you are fully taking advantage of additional card benefits that can justify annual fees (such as TSA-pre credits, free checked bags, etc.). Further, as your spending habits change over time, it is important to periodically reevaluate whether your current credit cards are still maximizing your potential rewards. If you decide to acquire and hold onto a card with annual fees, there also are a couple of ways to try to mitigate that cost down the road. First, Shannah Game, CFP®, recommends that you give the credit card company a call around the time that your annual fee is due and try to have the fee removed or obtain a retention offer of additional points. (She recommends just politely explaining that you like the card but not the fee, and she has had success with sales representatives just wiping it out.) Alternatively, you can generally downgrade a card with annual fees to a different card by the same company without fees. If you are no longer using the card regularly—or if you no longer take advantage of rewards to the same extent because of changes in your lifestyle—this allows you to keep the card open (which may be positive for your credit score) without the annual expense.
Staying out of credit card debt is the biggest way that consumers win in the grand credit card game, but as we discuss, there are several other ways that playing the game well can help your personal finances if you take time to be strategic about your credit card choices. As always, we are here to help any clients who would like to talk about these options in more detail and how they might apply to their specific situation.
