Smart with Credit Cards

This post is not about paying off credit card debt (I’ll cover it a in different post), rather about principles I’m using on a daily basis to be smart with my credit cards.

I moved from Europe to the US in 2017, and it was like being born anew: I had to adapt to a completely new financial system. The main difference is in approach to credits: in Europe, you have a good credit rating if you do not use credit (or do not use it often): it shows, that you can live on your own money. In the US you have to use credit cards: it shows that you are good at borrowing and returning others’ money.

The main paradigm shift threw me to another extreme: as now I had to use credit cards, I had no tools to track and understand if I’m good with credit cards or not. In fact, I was introduced to unlimited credit money… And it did take me some time to balance the extremes (no credit spending vs. unlimited spending) and formulate my approach.

I’m not going to discuss if we need to change the system or if it’s possible to live without credit rating… I’m a middle class corporate American employee, and I need to deal with the credit rating anyway. So let’s put such discussions aside.

The simple practical rule I follow is the best of 2 worlds:

Use credit, but live totally on your own money

Indeed, credit cards bring a lot of perks, to name a few:

• They provide cashback and points
• They provide nice discounts
• They can even provide “free” stuff: lounges, TSA pre-check, etc.
• They help to build a good credit rating

As for pitfalls, you know: it could seem that you own money when you see credit card limit. But in fact, it’s not your money, it’s just a sum a bank is ready to borrow you. Overspending is easy, credit card debt is painful.

Knowing these benefits and pitfalls, I formulated the following principles for credit card usage.

Set your limit

Set yourself a limit on all your credit card spending, and depending on your overall net worth (= how much money you have on different accounts), it can be:

1. Not more than your net worth. It works if you already have more money than you spend.
2. (if you don’t have credit card debt) Not more than the amount you can pay off with the next payroll
3. (if you do have credit card debt) Not more than the amount you expect to get with the next payroll minus amount you have to pay towards the credit card debt (don’t forget about interest).

Practically it’s not easy to track all spending if you have many credit cards. I would suggest using a budgeting app to track it. But you can do it manually as well: for example, check all your cards on a weekly basis and enter data to a spreadsheet.

Know your perks

As I mentioned above, many credit cards have additional perks. Maximize profit you can get from it. Simply assign “job” for each card:

1. A card has maximum cashback for a specific category. Use this card for this specific category (Tip: If you cannot remember, use stickers on the cards “gas”, “grocery”, “restaurants”… :))
2. A card can have a “floating” category: they could have maximum cashback for some period of time. Put yourself a reminder to change the “job” for such cards
3. Cards with the “custom” category: you can choose on which category you would get the maximum cashback. The wise decision is to cover a category not covered by other cards above.
4. Store chain cards have maximum cashback in the store, so it makes sense to use it there by default. But they could also have nice cashback in different categories, it worth checking it. Also if you do spend a lot in the store, it’s worth using this card for categories not covered by cards above, so you can maximize your points and spend less in the store.
5. If you have multiple cards covering the same category use one with the biggest benefit. (If the perks are the same, relax and use any)

Another thing worth mentioning is most of the banks provide additional programs with bigger cashback for specific items for a limited period of time. You can look there from time to time and activate the deals which make sense to you.

Make them work for you

It’s simply human nature: “When you have a hammer everything around can look like nails.” The same is true for the credit card perks: as soon as you see benefits, you want to use the cards more.

Don’t get into this trap: all these cashback and special deals are designed by banks for you can spend more than you need. Knowing that simply ask yourself, if you spend the money because you need (or really want) something or because you’ll get cashback. Would you buy the stuff if you hadn’t the deal?

If the answer is no, don’t play the game. I can tell you for sure, that your cashback will be less than the amount you will spend.

Cards with annual payments

Cards with the most perks are those which have annual payment. For such card I usually evaluate:

• Alternative cost of perks I’ll get for free (example: I would pay at least $50 for each free airport lounge)
• The probability that I’ll use the perks within the year (in my example: 2-3 times for sure)

Based on this simple analysis you can easily tell if you need the card (which in my case costs $95 per year and is totally worth it).

Credit rating

Credit cards are closely related to credit rating (well, the credit rating is the primary reason I have the credit cards). Here is how they are connected:

• Closing a card hits credit rating badly. I suggest considering closing cards only for the cards with annual payments when you understand that they are not paying off
• Keep your overall card spending less than 30% of your overall credit limit. Getting higher will hit you immediately, gelling below don’t affect the rating much.
• Always pay your cards on time, even if it’s just monthly minimum payment and you still have credit card debt. It’s the factor with the biggest weight in the credit card rating calculation.
• Don’t open cards too often. Opening a card lower your credit rating for a while, so it’s better to wait when it’s back on track before opening the next one.

Overall if you use the credit cards smart way they bring pleasant perks without overwhelming efforts. But they do require discipline in using them. If the order is not your strength I would recommend refraining from using the cards at all (though you can have them :)).