Over the course of the past few months we have repeatedly cited on this blog various reports showing that the number of new credit card offers is on the rise again. Moreover, the overall quality of these offers is unprecedentedly high.
But what does that mean to you? After all, the best credit card offers are reserved for those consumers who have the highest credit scores. And if your credit history is less than spotless, you may not be approved for any credit card, even as issuers are hard at work trying to push their customers away from debit cards and toward using their credit cards instead. And anyway, should you even care about credit cards?
OK, let’s take these questions in reverse order.
Can Credit Cards Work for You?
We’ve all heard about, and more than a few of us have been protagonists in, horror stories revolving around an often imperceptible decent into credit card debt, which has then led to all kinds of problems and has often ended in bankruptcies and destroyed lives.
But credit cards have another, much brighter, side that, when fully exploited, can help improve your credit score, make shopping cheaper and lower the interest rates on other forms of credit, such as mortgages and car loans, saving you a bundle in the process.
Now, which one of these two alternative realities you end up inhabiting is largely dependent on your ability to manage credit card use. It takes time to see the positive results, but the good news is that credit management is not rocket science and everyone can learn how to do it reasonably well. Here are five rules you should stick to when making credit decisions.
5 Tips for Choosing and Using Credit Cards
1. Do not actively apply for credit cards. This is important, though not easy to do. What I mean by it is that you should wait for offers to be mailed to you, rather than directly applying for credit cards, because that makes you look needy. Looking needy when it comes to credit cards is just as bad for your prospects as it is in other aspects of life. Just take your time and wait. Use your debit card or cash until you start getting pre-approved offers. Many experts suggest that you opt out of such offers, but that is a bad thing to do if you have not yet established your credit. Later on, when you no longer think you need to apply for new cards, you may do that, although I still would advise against it, because you may miss out on some really good offers.
2. Choose the best offer. Once you begin getting credit card offers in your mail box, don’t jump on the first one you receive. Take your time and compare what different issuers are offering you. If you’ve never had a credit card before, these first offers will not be as good as you would want them, but this is where you start. Still, if you can help it, do not agree to secured credit card arrangements, where you are asked to deposit with your issuer an amount equal to your credit line as a security against a potential default. Unless you’ve already managed to seriously damage your credit, you will eventually get offers on more regular terms.
3. Do not use more than 30 percent of your credit. Stick to this rule even if your credit line is only a few hundred dollars. The ratio of used to available credit, known as credit utilization, is a major component of your credit score and must be kept below thirty percent for both each individual account and for your aggregate credit across all accounts.
4. Pay your balance in full every month. This is critical! Do not carry outstanding balance from month to month, even if you are using a card with a zero percent promotional interest rate. Carrying debt from month to month is the only way to get in trouble with your credit card and the surest one to actually pay for using it, rather than the other way around. For one thing, you only ever pay credit card interest on the balances you carry from month to month. Worse, once you start getting into the habit of doing it, it is very difficult to determine the level of “affordable” debt and even if you set such a limit, it is now much easier to justify exceeding it, because the interest on any additional debt will be the same as the one on the “affordable” debt. What you should do instead is treat any amount that is unpaid at the end of each month as unaffordable and therefor unacceptable debt.
5. Choose the best rewards program. If you follow the above suggestions, your credit will slowly improve and eventually you will start getting the best offers — the ones with rewards programs. Again, as with your first card, do not jump on the first offer. Take your time and wait until you have several to compare, which you will. Now, different programs work best for different lifestyles, so there are no specific rules to be followed here. I’ve found that for me cash-back offers work the best. For you, an airline card might be the better choice. But here is the best part. Some cards nowadays come with bonus cash-back or airline miles that are automatically added to your account after making your first purchase or accruing a pre-determined purchase volume (say, $1,000). You can always cancel the card after you’ve collected the reward, if you don’t like it that much.
If you stick to the above rules, you will never get in debt, your credit score will improve and the cost of borrowing will decrease correspondingly. I have purposely avoided advising you against things like purchasing things you don’t need or can’t afford, which are staples in most other such lists. I’ve done this for a very simple reason.
If you don’t or can’t understand that spending beyond your means will get you in trouble, no amount of telling you otherwise can possibly have any impact on your behavior. At its core, debt management is all about common sense, which is all you need to keep it in check and make it work in your favor.
Image credit: Gotoexit.com.