Credit Card Basics (Plus Hacks)
Hi all! This week's money management topic is credit cards. I know, it might as well be a horror movie. Credit cards have been known to cause some strife, and people are often rightfully skeptical of them. However, if you know how to use them, credit cards can be a powerful tool and one of your best financial resources.
Here are the basics:
- A "secured" credit card is one that you have to put cash up as collateral to get. These are meant for building credit if you are young and have no established credit or if you had some bruises on your credit and need to repair it.
- "Unsecured" credit cards are open lines of credit that you can draw on any time and only pay on the balance you carry month to month.
- Most credit cards report payment history and % of utilization once a month. This makes them the best tools for building credit fast.
- The way interest works is:
1) You only pay if you carry a balance. So, if you pay the whole amount by the due date every month, you do not pay interest.
2) Most cards use "average daily balance" to calculate interest owed. it is exactly how it sounds; at the end of the billing cycle, you are charged interest on the average balance you carried for the past 30 days.
those are the basics, now, here are some hacks to get the most out of your credit cards:
1) Choose 1 card (ideally one with rewards and, if possible, a lower rate) and keep that one open forever. One factor that weighs heavily on your credit score is "average age of credit history." Keeping this card open forever gives you a huge outlier and boosts your score.
2) Pay all your bills, including variables like groceries and gas, with a cash back credit card, then pay off the balance every month to avoid interest. Doing this means you get paid for buying things you were already going to buy. Combine this with hack number 1 for best results!
3) Utilize balance transfer offers and welcome bonuses. When your credit score gets up there, you will be inundated with credit offers. Only take the ones that offer incentives. once or twice a year, I sign up for a new credit card, take the case out balance transfer, and pay a chunk of my higher interest debts off. If the card has a bonus, like, "get $150 when you spend $1,500 in the first 60 days," for example, what I do is pay all my bills at once with that one and qualify for the bonus, then, pay it off and utilize the balance transfer.
4) If you are doing the above hack to get bonuses and 0% periods, make sure you close these cards when they no longer provide benefit. Rotating cards like this is another reason why hack number 1 is important, because the length of credit history provided by your 1 card will offset opening new ones.
5) One of the single largest impact items on your credit score is % of credit utilization. The best rating is going to be between 0-20% utilization. So, if you have $1,000 in credit, you would ideally want to keep your utilization under $200. For this reason, you need to have 1 or 2 cards (again, preferably the same one you use for hack 1) that has a huge limit so you can offset balance transfers. Mine, for example, is a Capital One card that has a $12,000 limit and gets 1.5% cash back. I never carry a balance, so I have that entire 12k to offset my other activities.
6) A final thought; you don't have to only balance transfer when rotating cards. If you get one of those $150 offers, or whatever the offer is, use it for a big purchase you were going to make anyway. Example; I had the money in savings to book my honeymoon, but I got a Chase card instead and booked it on the card. Doing so gave me a $150 bonus PLUS the card had cash back and earned me $64 for the booking. I could have paid it right away, but I got 0% for 12 months, so instead, I invested the savings and earned another $60 in interest before I paid it off at the 11th month. So I saved $274 by doing it that way, and it took all of 10 minutes to apply.
I hope you found this post useful! Let me know if you have any questions or if there is a money topic you would like me to cover next!
Until next time,