This week we have another ‘Mailbag’ edition. For those not familiar: the questions I receive that either can’t be answered in a short tweet, with a quick text or if the question may be helpful to more than just the (question) poser – I’ll share my answer as a post. I hope you find this one enjoyable and helpful.
Mike, first off, love the blog. My question came after reading your recent article about credit cards and rewards. I wanted to know what you thought is a good or reasonable amount of credit cards to have? Also, what do you think about adding new cards and canceling other cards? Or just having cards that you don’t use a lot? I’ll give you an example I have had a (1)capital one credit card: for about 2 years. that I don’t use often but I earn 1.25% on everything. (2) I have a discover card: have had for a year and a half that earns 2% on food and gas and 1% on everything else; I use this card most frequently. (3) A chase freedom: have had for a year. with new categories every quarter to earn 5% i.e.: its restaurants this quarter. And it earns 1% on everything else. I use this which every category is 5% (4) Amazon Prime Store Card: about a year this card can only be used on Amazon but you earn 5% on everything on Amazon which I use a lot.
I was thinking about applying for the Amazon chase visa which is 5% back on all Amazon purchases. 2% back on all restaurants, gas stations, and drug stores, and 1% back on everything else. If I got this I could get rid of the capital one card, the discover card, and the Amazon Prime store card. Do you think this would be a good move? Only advantage if I keep a discover card open is they give me $20 every year for good grades. Let me know what you think. Thanks, Mike!!
Adam – You have a lot going on there, and as I thought through your questions and situation, I started thinking back to some basic rules I’ve adopted over time about credit cards. I also realized that I haven’t shared them as a concise post on the blog, so here goes. I hope this answers your questions:
Mike’s 7 credit card commandments:
1) Never buy anything with a credit card that you don’t already have money for in your checking account.
If you follow this rule, you will never pay a cent of interest.
2) When starting out – only use the credit card for goods that either go on your back or in your mouth.
This is good practice in general, but limiting what purchases you make using credit limits your risk of overextending while you’re settling into using plastic. Besides, it’s an easier pill to swallow if you make a small mistake early and have to pay minor interest on a grocery purchase rather than Third Eye Blind tickets. PSA – I advocate young-ins going to the concert… via paying in cash.
3) Only use a credit card that has an annual fee IF you are 100% sure your benefits will exceed that fee.
How can we determine this? By thoroughly researching the card and it’s benefits… And by following rule #4:
4) You don’t need more than 2 cards
If you’ve done your research and determined which card will give you the best rewards (based on how you spend your money) then keep it simple and maximize those rewards. How do I mean finding which card is best for you? Some cards are targeting singles that spend at restaurants and bars, other cards target travelers, while some target families that shop at grocery stores, etc. Know thy self and use the card that best fits said self.
Why 2 cards rather than 1? Our primary card is an American Express card and some merchants don’t accept AMEX. For those merchants we carry a VISA – it’s everywhere else I want to be.
5) Pay your card off every Friday
The first of the month falls at varying times throughout the year, while Friday happens the same time every week. Forming good habits makes good sense. On top of that: because we have the money already in our accounts, only pay for essentials, and never want to pay a cent in interest, paying every Friday is a simple way to make sure we reap the rewards and eliminate the risk.
6) Don’t take your credit card to the bar
I don’t want some random bartender holding onto my card, opening up a tab, and doing God knows what while I’m over having fun with my buddies. For security’s sake – leave the card at home. Also, if you take cash with you to the bar, there’s a 0% chance you get a little crazy and spend a little more than you’d want to. Budget what you’re willing to spend for the evening, take that in cash, and when it runs out – it’s time to head home. I feel like this tactic can save you in other ways, too… That may be for a different post, though.
7) Contrary to what you may hear, if you want to live in modern society and partake in that society, you will need a credit card.
Sure, there are other ways to improve your credit score, but the accessibility of goods and services added to the risk reduction of not carrying wads of cash around are just a few reasons. Let’s throw rewards on top of the pile and it starts becoming a no-brainer (as long as you follow the commandments above, that is).
Thanks for reading Mike’s 7 credit card commandments!
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I’m glad you’re here. Thanks again and talk soon!