11 tips for managing your credit cards wisely. Used correctly, your credit cards will become an important part of your financial toolbox.
Perhaps you’re reading this article because you’ve been following the Stepping Stones to Financial Freedom and just completed Stepping Stone #3: “Steamroller” and are freshly out of debt. Or maybe you simply arrived at this article courtesy of a Google search. In either case, now is the perfect time to learn how to manage your credit cards wisely.
How to Manage Credit Cards Wisely
Just like so many things in life, there is a good way to do this, and a bad way to do this. I think we all know the bad ways to use credit cards, so we’re not going to spend any time discussing that.
Instead, I’m going to give you 11 tips on how to manage your credit cards wisely. And when you learn how to do that, you will have added a very powerful tool to your financial survival kit.
Tip #1: Never Charge to Your Card What You Can’t Pay Cash for Today
That’s a very, very important statement. And it really gets straight to the point of what your credit cards are NOT for. And that’s accumulating more debt. Unfortunately, way to many of us are doing just that.
Your credit cards are to be used as a way of establishing or building credit. That’s it. Period.
So again, don’t use your credit card to buy something you really can’t afford to buy. I know, it’s so tempting to buy all these things we see on TV, hear about on the radio, or our friends and family just can’t stop talking about. Oh yes, then there’s the pressure from the kids to get this thing or that thing.
Just don’t do it. Don’t cave in to what I’ll wrap into a couple of words: peer pressure. To heck with what all these people say you need! They don’t know you, they don’t understand your specific situation, and they sure won’t buy it for you. So, simply treat their chirping in your ears as just another bit of noise and turn their volume down.
It takes discipline to do that. But you can do it. And once you’ve learned how to make good financial decisions such as not charging to your card what you can’t pay cash for today, you’ll be well on your way to financial and personal freedom.
Tip #2: Always Follow the Less Than 30% Credit Card Utilization Rate Rule
I know, that may be a bit confusing to understand at first. But it’s really important that you do understand exactly what I mean by that, and strictly adhere to it.
First, here’s why it’s so important to always keep your credit card utilization rate below 30%. Believe it or not, your credit score is significantly impacted by your credit card utilization rate. For example, every time you go over that utilization rate, your credit score will drop. In fact, it’s quite typical that your credit score drops between 12 to 20 points as soon as you go over the 30% credit card utilization rate. And it will stay down there until you fix that problem by paying that balance down. So, protect your credit score by NEVER going over that 30% number.
Now that you understand that, let’s learn how to calculate your credit card utilization rate. It’s actually really easy. All you do is take your credit limit and multiply that by 30%. So, let’s say your credit limit is $1,000. Multiply that by 30% and you get $300. And that is the dollar number worth of charges you never want to exceed on that credit card. Stick below that dollar number, and you will have learned a very important way to manage your credit cards wisely.
Tip #3: Set Your Credit Cards to Autopay the Balance Each Month
This is one of the easiest tips to follow because all you have to do is get on your computer, log into your credit card account, and set it up to autopay the balance every month. If by chance you’re finding that difficult to figure out, then just call your credit card company and have them set it up for you. And don’t hang up the phone before they send you and email confirming your credit card balance is set to autopay every month!
If you’re finding it difficult to accomplish this step because your credit card balance is too high, then please go back to Tip #1.
A little side-bar comment while we’re on this point. You may have heard some people say that you need to always have a bit of a balance on your credit card when your balance is reported to the credit bureaus. The people saying this do so because they believe your credit card will look inactive and maybe your credit score will drop if a zero-dollar balance is reported to the credit bureaus every month.
That’s just not the case at all. So, save yourself a whole heck of a lot of time and confusion spent trying to time it just right and simply set that credit card balance to autopay every month. It’s one of the easiest, and most important, ways to manage your credit cards wisely.
Tip #4: Never Apply for a Credit Card with an Annual Fee
Oh my gosh, why in the world would you every want to pay an annual fee for a credit card? There are hundreds and hundreds of credit cards out there with zero annual fee. And great rewards programs as well (we’ll talk more about that in Tip #7).
Here’s a great way to find a super credit card without having to pay an annual fee. By now, you have hopefully found your partner bank or credit union by following Stepping Stone #1: Partner Bank. If not, please go to that step and take the time to find the perfect bank or credit union for you. If so, I guarantee you they’ll have multiple credit cards with a zero annual fee.
Please don’t have a heart attack if you currently have a credit card with an annual fee. And definitely don’t cancel it (read why not in Tip #5)! Just don’t get any more credit cards with annual fees because it’s quite easy to find the perfect zero annual fee credit card match for you.
Tip #5: Never Cancel a Credit Card
All right, it’s confession time. Some of the best lesson I’ve learned in life have been through the mistakes I’ve made along the way. And one of those mistakes was to cancel one of my credit cards many years ago.
It made sense at the time. I wasn’t using it anymore, so why not? Well, I learned why not to cancel a credit card the hard way. And it taught me a powerful lesson. And even motivated me to share the lesson with as many people as possible so others wouldn’t make the same mistake.
Well, you never cancel your credit cards because the second you do that, you’ve just shortened the age of your credit and your total number of accounts. And both those things will lower your credit score.
Let’s spend a bit more time on how the age of your credit is calculated.
All the bureaus do is divide the combined age of your accounts by the number of your credit accounts. So, let’s say you had four accounts, and the oldest account you had was the first credit card you got 15 years ago. And let’s say the other three accounts were each two years old. Therefore, your credit age would be 15+2+2+2, for a total of 21, divided by 4, which equals 5.25. But when you cancel that credit card you got 15 years ago, your credit age would equal 2+2+2, for a total of 6, divided by 3, which equals 2. And believe you me, your credit score will go way down because of that!
So please, don’t ever cancel a credit card!
Tip #6: Use Your Credit Cards to Increase the Age of Your Credit
Wow, was tip #5 a perfect segue to this tip or what!
Well, if canceling your credit cards will lower your score in part because doing so reduces the age of your credit, then the opposite is true over time. And that’s because, unlike a car loan, student loan, mortgage, or any other form of non-revolving credit, your credit cards do not have a contract end date.
Think about that for a minute and you’ll understand why credit cards are a form of revolving credit. The answer is because they never truly end. They just go on year, after year, after year.
Learning how to manage your credits wisely is so much more than paying the bill in full, on time. It’s more about learning tips like this one that not only help you purchase things you need, learn how to live within a budget, but also, how to manage and ultimately improve, your credit score.
Tip #7: Do Get Zero Annual Fee Credit Cards with Rewards Points
I’ll tell you what, two of the neatest things about learning how to mange your credit cards wisely are using credit cards with zero annual fee AND rewards points. That’s free money!
Now remember Tip #1: Never Charge to Your Card What You Can’t Pay Cash for Today. That takes some discipline, but you can do it. Once you’ve mastered that tip, it’s really downhill from there. You’ll be amazed by the number of rewards points you build over time.
My favorite rewards points are cash back rewards. It’s like saving money every time I make a purchase with my credit cards.
And if you’ve picked your partner bank or credit union wisely, you may even be able to use those same rewards points for discounts on member purchases. Take Navy Federal Credit Union as an example of a credit union with awesome zero annual fee credit cards with rewards points. I can actually use my points for discounts on travel, lodging, car rentals, and the list goes on and on.
Hopefully this tip has brightened you day a bit. And perhaps after reading this tip, you need to go back to Stepping Stone #1: Partner Bank, and make sure you’re really with the best bank or credit union you can find.
Tip #8: Use Your Credit Cards to Increase Your Lines of Credit
The number of lines of credit you have is a determining factor for a bank when considering you for a loan for a bigger purchase. For example, perhaps it’s time to buy your first car. Well, if you have zero lines of credit and walk into a bank and ask them for a car loan, you may be disappointed with their reply of…no.
Don’t blame the bank. You’re asking them for a loan, but you don’t have any history at all of paying a loan back. In fact, many banks require three lines of credit as a condition of approval for an auto loan.
So, clearly, if you had multiple lines of credit, you would have stood a much better chance of getting an approval for that loan. Not to worry, just learn something and plan ahead. And take the steps necessary to increase your lines of credit. And share this article with anyone trying to learn how to build their credit!
One of those steps you need to take is getting several credit cards. Don’t go crazy with the credit limit increases here! You can add to your credit limit as your income situation improves. For now, keep the credit limits low and follow Tip #1. The rest will take care of itself over time.
Tip #9: Request a Credit Limit Increase, But Remember Tip #1!
As you make the wonderful journey through life, it’s a safe bet that your income will increase. When that happens, you need to consider increasing the limit of your credit cards.
Something to consider if you do decide to request a credit increase: your credit card company will pull your credit. And as a result, you’ll have a hard hit on your credit. That hard hit will lower your credit score by about two points and it will take two years before that hard hit comes off your credit report.
But they will most likely approve the credit limit increase assuming you don’t have any derogatory comments on your credit bureaus.
And one of the crazy benefits of a credit limit increase is that it may actually increase your credit score. That’s simply because you now have more available credit. After that, it’s just up to the “funky math” they use at the bureaus to determine how much your credit score increases.
Now this is important to remember. An increase in your credit limit does not mean you ignore Tip #1: Never charge to your card what you can’t pay cash for today. Stick to these tips. Use them to take advantage of your credit cards rather than letting the credit card companies take advantage of you!
Tip #10: Keep Your Credit Cards Active or They May Get Cancelled
One of the biggest mistakes people make with credit cards is to stop using them. And that’s a problem because if you let that credit card, or credit cards, go inactive for too long, the credit card company will cancel your credit card. And they’ll cancel it right out of the blue. All you’ll get is an email from the credit card company stating that they’ve cancelled your credit card due to inactivity.
And when that happens, your credit score will drop significantly, and there’s absolutely nothing you can do about it. It’s game over for your credit card and that drop in your credit score.
So, never let your credit card, or credit cards, go inactive. And that’s really easy to prevent. Just remember to charge something small every month. Perhaps it’s a tank of gas for your car. Or maybe it’s to pay for groceries.
One of my favorite ways to prevent my credit cards from going inactive is to pay my utility bills with my credit cards. Most utility and phone companies will let you do that. It’s a super trick for both keeping your credit cards active AND for getting some rewards points.
Tip # 11: How Many Credit Cards Should You Have
That’s a great question. As discussed earlier, many banks require three lines of credit before they will give you a loan for a bigger life purchase, such as a car or home.
That being said, three credit cards are a good place to start. You could get two different credit cards from your bank, and one credit card (Visa, Discover, Master Card, etc.) for all of your fuel purchase. Then just keep them for life and let them help you improve your credit score over time.
You don’t want to get too many credit cards. And this is where so many people get all mixed up and all of a sudden find themselves with eight or more credit cards. You know the story, a card from the favorite clothing store, a card from the computer store, a card from the discount shopping store, a card from the grocery store, and on and on the list goes. Before you know it, you’ve got WAY too many credit cards and run the risk of some of them going inactive.
So, use some discipline here and pick your credit cards carefully. One of the most important things about managing your credit cards wisely is learning how to say NO. Don’t fall for the trap at any one of those places mentioned above and “save 20% on your first purchase”, because you’ll regret it later. When in doubt, remember the KISS principle: Keep It Simple Stupid. Works for me every time, and it’ll work for you too!
Conclusion
I mentioned this earlier, but it’s worth discussing it again. I’ve learned a lot from the mistakes I’ve made in the past. And being who I am, I decided a long time ago to share as many of those lessons as possible with as many people as I could to hopefully help you out there not make the same mistakes I’ve made.
Over time, I’ve become quite good at managing my credit cards wisely. And I know, beyond a shadow of a doubt, if you follow each of these tips, you too will become a master at smart credit card management.
Next Steps
You’ve made it this far! Keep up the good work.
Once you’re all set with your credit cards, it’s time to move on to Stepping Stone #5: Retirement Savings. That’s a really exciting step because you’ll begin to see the light at the end of the tunnel. You’re going to make it! You’re going to be totally debt free and well on your way to personal and financial freedom.
