The Most Effective Use of Credit Cards

by David Bakke

credit cardsThis article is for those of you who are moving quite well down the road to financial success.

Or at least somewhere close to it.  You have gotten to the point where you pay your credit cards off in full every month and carry no balances-that’s a great place to be in if you’ve recently gotten there for the first time.  I remember it well!

At this point in time, credit cards can still play a very important role in your life.  Used properly, they can keep your credit rating and score strong, they can keep you fairly well protected, and believe it or not, they should be able to also generate some cash for you.

I’d like to go over just a few of the things that I do with my credit cards to make sure they are working as hard for me as I am for them.

First, choose the right one.  In my opinion, the credit card(s) that you use the most should have one of the top “cash back” options that you can find.  Regarding the credit cards that offer “gifts” or rewards that are not actual cash, I have never really found anything there to my liking.  Also, wouldn’t you rather have cold hard cash? This way, YOU can decide which prizes and so forth you want, and you can probably get them at cheaper prices that what all of those points cost you.  I think the only exception might be for those of you that fly a lot.  The “miles” cards may offer fares at a decent enough rate to make it worthwhile to go that route-if you fly often.  Other than that, stick with the cash!

Second, use them for everything.  I try to keep enough cash on hand or in my wallet for emergencies only.  This is for safety reasons, as well as the fact that if I am getting a 1% discount  every time I buy something, I then I want this discount to be as much as possible.  Plus, by doing so, I think you maintain a stronger credit rating and/or score.

Third, don’t close them.  Believe it or not, you should have a healthy amount of what they call “available credit”.  Meaning, if you only have $5000 in open credit and you use $4,000 of it each month, this is not good for your credit score.  However, if you have $80,000 of available credit and use only $4,000 of it each month, then this again improves your credit score.  Why-I have no idea.  You may want to consider slowly opening new lines of credit for this very reason.

Fourth, don’t close your cards out.  For the same reason mentioned above, it does not make financial sense to “close out” a bunch of cards that you may no longer use.  It may seem to make your life simpler, but you could be negatively affecting your credit rating.  Also, you probably need to get on some type of program for using these cards every few months.  Credit card companies have been known to reduce credit lines or even close accounts for inactivity.

These are just a few of the concepts that I have implemented in my daily life to get the most out of my credit cards.  I generate as much cash as I can from them, as well as using them to keep my credit rating and score as healthy as possible.

Keep in mind that most of this advice is only for those of us who can pay the balances off in full at the end of every month.

Your comments and suggestions are greatly appreciated below.

{ 4 comments }

1 Qt March 28, 2010 at 9:47 am

I can’t quite understand the american “credit score” thing. Especially the idea of never having a debt, not using credit cards equaling not to a good credit but to a bad one. And i’m not speaking about people trying to go “under the radar” but about people with a job, bank accounts with money on them) owning their home/car and such, those are things you can base a credit score on, right ?
I’m not against credit cards, i have one and plan to get another in the future (and still some friends ask me why i want to do that).
Maybe it is just a different mentality (i’m from nice old Europe 😉 ) we use ATM/debit cards mpre than credit card and even for them most people chose the one that balance themselves with your bank account monthly above the revolving/financing. Surely i’m speaking about people without financial issues and this with the crisis at all seem to be harder and harder every passing days.
Going a little more personal i try to spend only money i already have, even for bigger expenses but hey, it was hard to convince the car dealer i wanted to buy my car without financing! 🙂 . Maybe i give to much importance at non economically accountable things in doing my financial choices like not liking the idea of “using” something that isn’t really mine yet or the hassle of remembering the payment (yes, even automatic ones, you have to remember them while thinking at your cash-flow).

2 David/Yourfinances101 March 28, 2010 at 1:55 pm

Qt:

You are right on point with all of your comments! Unfortunately, our scoring system is the way that it is and it is up to us to understand it and do our best to maintain a good score.

Credt ratings and scores can now affect everything here from interst rates to auto insurance rates to your abilityto get a job.

It is the unfortunate truth.

I guess you should consider yourself lucky that you have the financial mindset that you do–it seem like it is a good one.

Thanks a lot for commenting
.-= David/Yourfinances101´s last blog ..The Most Effective Use of Credit Cards =-.

3 DarkRydz March 28, 2010 at 5:09 pm

Interestingly enough, I saw Dave Ramsey on Fox Business awhile back and he said that because he didn’t have any credit cards or debt – he’s credit score was actually zero. He didn’t seemed too worried about it.

Me personally – I’m more concerned with low credit scores due to identity theft. I froze my credit reports to guard against this. Albeit it’s a pain when I need to lift them temporarily, it pays off in the long run.

I do keep one credit card to pay utilities (planned expenses) that has a nice rewards program. That’s all I have though. The rest is debit card or cash. I do have some debt – student loan, car loan and a personal loan I used to buy a boat (big mistake!), but my timely payments keep my credit score in good shape. Once these loans are gone though, they are gone – I’m going to keep saving and buy with cash/debit. If my score lowers because of it – so be it.

You raise some really great points and I agree with them so long as you aren’t speaking to a compulsive shopper. Then “using the card for everything” is more often than not a recipe for disaster.

Cheers!
.-= DarkRydz´s last blog ..How it all Started =-.

4 David/Yourfinances101 March 28, 2010 at 7:44 pm

DarkRydz:

Yes, you bring up some interesting points. Of course, the “use your cards for everything” only applies when you have the right amount of discipline.

Thanks for your feedback–its greatly appreciated
.-= David/Yourfinances101´s last blog ..The Most Effective Use of Credit Cards =-.

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