Credit is a perfect example of how a tool can provide great benefits or can lead to disaster. So many people are scared of using credit cards for fear of racking up debt, but the world runs on credit. With responsible use, credit can become a powerful tool in your favor, whether you need to build credit for a large purchase (aka a car or a house), or just want to be more financially healthy. I’ve shared a few of the basics on building credit, and if you’ve already gotten that far, great! Here are the next steps you can take to make the most out of your credit usage:
1. But First, The Basics
Before we dive in, let’s set three ground rules:
- Always pay off your balance, in full and on time.
- Never overspend beyond your budget – credit can feel dissociated from cash spending and trick you into thinking you’re not actually spending that much. Don’t fall for it!
- Automate your payments so you never have to worry!
Knock out two of the three in one fell swoop: if you have a credit card, link a checking account and set up a monthly automatic payment for the full balance right now. It doesn’t matter how responsible you are, or how organized; if you miss just one payment, your credit score will be dinged. If you aren’t paying in full, the interest you rack up will negate the rest of the benefits. Do yourself a favor and set this no-fail protection up at the very beginning.
As for not overspending, use a budgeting tool and connect your credit card to it. That way, you’re still keeping tabs on your spending, and it’ll still feel like cash going out of your pocket in real-time, even if it doesn’t affect your bank account until you pay the balance off.
2. Earning Rewards
If you’re following all of those rules, awesome. You’re doing well! Now let’s take it to the next level. Take a look at your monthly spending habits, and find the card that best matches. For example, most of my discretionary spending goes towards groceries and gas every month, so I recently got the Blue Cash Preferred card – a card that offers 6% back on every dollar I spend at grocery chains, as well as 3% back at gas stations and 3% at department stores.
Some cards offer rotating categories for extra points back, and if those categories match your spending, they may be worth it – but be careful, as the categories can change over time. Some cards offer a baseline reward, like the Citi Double Cash card, offering 2% back on every purchase regardless of category. Pro-tip: switch between this card and one that offers more rewards based on your spending habits, so you’re never earning less than 2% back on your purchases.
3. Spending Rewards
If you’re just looking to line your pocket, the most common reward system will be based on cash back or statement credit. I’m a fan of this because the rewards I rack up can go towards anything that comes up. If, however, you’re a heavy traveler, it may be worth it to find a card tailored to your traveling needs, be they general or with miles towards a specific airline. Depending on the card, you’ll not only earn more points from travel spending, but also be able to use those same points at a higher value when you spend them on travel. Again, it comes down to your specific spending habits and needs. When in doubt, go with cash back, as it’ll be the most versatile.
4. Consider Fees
Don’t be dazzled by the rewards, though. Before you apply for a new credit card, make sure you’re aware of the costs. Most basic credit cards are free, but for the higher rewards or perks, you’ll find an annual fee. For example, that Blue Cash card I mentioned comes with a $95 annual fee – ouch.
However, it’s easy to figure out whether the fee is worth it. Find the fee and compare it to the average annual rewards you’d receive, based on your average spending. For me, that meant running the following numbers:
(6% of Average Annual Grocery Spend) + (3% of (Average Annual Gas + Department Store Spend)) – Annual Fee = Total expected annual value
If that total is positive, woohoo! If not, don’t bother applying for the card. For added
fun accuracy, consider the benefits of a card that doesn’t require a fee, like the previously mentioned Citi Double Cash Card, which offers 2% back on all purchases. Use the same categories of spending, multiply by the new point amount, and compare. Now the numbers are:
2% of (Average Annual Grocery + Gas + Department Store Spend) = Comparable Cash Back
Whichever number is higher is the card you want to go with.
5. Sign-Up Bonuses
Some cards will offer a sign-up bonus if you spend a certain amount on the card in your first few months of having it. If the card already provides great points and you won’t have to overspend to hit the target, go for it! If, however, you know you’re not going to spend $x in the next y months, maybe wait to apply for the card until you have a large, necessary purchase coming up.
If we combine all of the above, you can see why people “churn” through credit cards – or continually apply for new cards to get the most benefits. In fact, there are entire online communities dedicated to churning, and for good reason. Some people have been able to make a decent chunk of change just off of the practice, although it’s a classic “spend money to make money” madness. Every few months, you may be tempted to apply for a new credit card to maximize the signing bonuses or rewards. But a word to the wise: it will affect your credit score. Each credit inquiry will dock you points, and you’ll be seen as a riskier candidate for credit down the line.
Warning aside, if you’re not planning to make a big purchase (aka car or house) any time soon, and can stay organized enough to avoid fees and interest, go for it!
7. Stay Organized
If you’re overwhelmed at the prospect of having multiple credit cards open at once, I get it. With the reward categories, annual fees, and sign-up bonus targets, it’s a lot of numbers to keep straight at once. I’ve started using a system to prevent confusion while using two or more cards at once:
- Sticky note labels – seriously! While I’m just getting used to a card, I write out the point categories and values on a sticky note and attach it to the card. 2% back on everything is easy enough, but anything beyond that warrants a reminder.
- Only carry the ones worth using – If I only get points from a card via Amazon, I’m not bringing it with me in my day-to-day life. If I no longer get great rewards from a credit card, I’ll either cut it up or leave it at home (or cancel it, if it’s not boosting my credit score).
- Put the current priority card front and center – if I’m trying to spend $x for a sign-up bonus, it’s in the front slot in my wallet so I have to see it every time I need to pay for something. If I’m trying to remember to use the new higher point-value card, that one’s in front.
- Have a checklist – if I’m looking to earn that sign-up bonus, there are some online services I’ll always link with the new credit card. This can be utilities, insurance, and of course my Amazon account. If the money has to be spent anyway, it may as well go towards that bonus!
- Mark your calendar – if I’m churning and trying to avoid fees, I mark important dates on my calendar. These can be the deadline to earn a sign-up bonus, or it can be a notice that the first year is almost over (and I can decide whether to shut the card down to avoid another annual fee).
Otherwise, just keep track of your spending, and you should be good to go!
Credit cards are tools, and while they can create debt and damage your credit, they can also provide great perks and extra cushion in your budget. Stay responsible, and if you’re up for it, churn, baby, churn.
Tis is a 20-something recruiter, startup enthusiast, finance blogger, and proud feminist-slash-crazy cat lady. Find her on Twitter or check out the blog for lifehacks and musings on personal finance, professional growth, and enjoying the journey to early retirement.