12 Credit Card Rules You Should Never Break
Is there a method to the credit-card madness? (Hint: The answer is yes.)
According to Experian, the typical American has four credit cards and carries on average a $6,000 balance. In some ways at least, this isn’t necessarily a bad thing, says Prudential’s financial wellness advocate Tiffany Aliche, aka The Budgetnista. “It’s a myth that credit cards are innately bad,” she says. “Think of them instead like a tool, just like a hammer. You can pick that hammer up and build a house, or you can pick up that same hammer and destroy that same house. It depends entirely on the user.” We asked our trusty financial experts for their top credit-card dos and don’ts…
Stick to one or two cards
It’s a common thought that in order to have good credit, you need credit cards. The answer is yes—and no, says Aliche, who recommends keeping at least one but not more than three cards. “Remember, if you have no credit history, you are a bad borrower,” she says. “It’s just like if my 16-year-old relative said, ‘look, I’ve never been in an accident,’ yet she’s never driven a car, so therefore she’s a bad driver. Well, the same goes for credit.” However, that doesn’t necessarily mean you need to fill your wallet with plastic in order to have good credit, either. “Because the word ‘credit’ is in credit cards, people associate the two, but your credit score is about much more than that,” she says. “Your credit score encompasses many more aspects than cards. It’s about any time you borrow and pay back money, whether it’s a mortgage, car loan, student loan, even your utility bills.” Learn how one man achieved a perfect credit score at age 45.
Steer clear of store cards
“I’m not a fan of department store credit cards for two reasons,” says Michael Foguth, founder of Foguth Financial Group in Brighton, Michigan. “For one thing, the revolving interest rate is typically highest on those department store cards. For another thing, limiting where you can use a particular card has downsides.” Instead, he recommends sticking to one card that offers rewards and using that for every credit-card purchase. This is what happens to your credit score if you close a credit card.
Remember the 30 percent rule
You could be paying your monthly bill on time like a boss, but if you’re continually carrying a high balance, that will bring your credit score down. “Think of 30 percent as your new maximum, and realize that anything above that is going to tank your score,” says Aliche. Gearing up for a big purchase, like a home or car? Then aim for 15 percent, she says. Easily improve your credit score with these methods.
Change your perception about credit
Now that debit cards are as common as cash, we’ve become a swipe-and-go society. “It’s easy, though, to forget that every time you swipe your credit card, you’re taking out a loan,” says Aliche. “When you look at it that way, it changes your perception about credit cards and makes you think twice before automatically swiping away.” These are the times you should never pull out the plastic.
Take advantage of all-time low-interest rates by bargaining for a lower rate, suggests Foguth. Aliche agrees. “Let’s say you bring your interest rate down from 10 to 5 percent,” she says. “That means for every $100, $10 is going to interest and fees, versus $5. That’s a significant amount over a period of time. That’s why I suggest that people regularly negotiate their rate. Pick a date every year that you spend on negotiating your fee, and you may be surprised how easy it can be to lower it.”
Steer clear of cash advances
“I used to say credit cards were the devil, and I changed my stance on that, but now I am here to tell you that cash advances are the devil,” says Aliche. “First of all, the interest rate is so bad, it’s a lose-lose-lose. And chances are, if you need a cash advance, you’re not likely in the position to pay it back. If you need cash, I’d actually prefer someone borrow money from their retirement account, because at least when you pay it back, you’re paying it to yourself.”
Pay your balance every two weeks
Credit-card apps make it easier than ever to pay on the go rather than wait for a paper statement. Foguth suggests using technology to your advantage, and pay your credit card bill every two weeks rather than every month. “That way, you never have a balance carried to the next month, and there’s not a daunting number at the end of the month, which makes it easier to ensure you aren’t racking up a huge number that you can’t pay off at the end of those 30 days,” he says.
Find a card that matches your life
Drive a lot? Then a gas card is a smart idea. Family grocery bill adding up? Get a grocery card. “For me, I travel a lot, so I use a travel card where I get extra points and cashback for any travel,” says Aliche. “Get a credit card that is in alignment with how you navigate your life, one with rewards, so you are getting cash back for purchases you’re already frequently making anyway.”
Look for cash-back cards
“I’m a big believer in cash-back cards,” says Foguth. “I put everything in my life—gas, restaurants, you name it—and pay it with one credit card that offers cashback. Even if I get 1 percent cashback, that’s 1 percent more than if I used a $100 bill in my pocket,” he says.
Be a “paper towel” person
Any discussion of credit and finances isn’t complete without discussing the emotional components of it. Fear, shame, and guilt over financial mistakes can actually prevent you from seeing solutions that may be right in front of you. “Trust me, I’ve made just about every financial mistake you can make, and I’m on the other side now,” says Aliche. “But first, I had to let go of fear and shame in order to get to those solutions. We’re so hard on ourselves when we’re learning financial things, so I tell people to be a paper-towel person. If you spill something, for example, you can either beat yourself up over it, or you can get a paper towel and clean it up like you are going to do anyway. This made a big difference for me.”
Use credit cards versus cash for big purchases
Have a big purchase in mind? Put it on your card—and pay it off in full—rather than use cash, suggests Foguth. “That way, you’re getting all the rewards on that big purchase, and you are also showing that you’re a good borrower, so you’re getting cash back and helping your credit score simply for paying by credit card.”
Stop saving for retirement
Have your attention? Good. Because our experts agree that if you are going to choose between retirement savings or paying off debt, tackle the plastic first. “I know it sounds counter-intuitive, but listen to this: I have clients who have $1 million in retirement savings and $40,000 in revolving credit card debt that they’re paying interest on. This means that if they stopped saving money for retirement for 6 to12 months, say, they’d be debt-free and save themselves the interest that they were paying on their credit card. Think about it, if you save yourself 10 percent interest with your credit card company, that’s the same as making 10 percent on your investment,” he says. Speaking of retirement, you’ll want to avoid these top 15 mistakes.