MilesForTwo

Credit Cards are not Evil

My parents used credit cards for everyday expenses when I was growing up. I remember my dad using his Discover Card for gas, but then his random Visa card for other expenses. He definitely didn’t maximize category bonuses as much as I do now, but he was somewhat aware of them. I also remember my dad transferring balances from one 0% card to the next 0% card. He equated it to getting a free loan. Now looking back that probably didn’t help his credit score due to the fact that it lowered his Average Age of Accounts (AAoA) and kept his utilization high (>30%). With that being said, this is what I vaguely remember as a kid. So I grew up in a household that utilized credit cards, always paid the bill in full (unless it was a 0% interest card), and never spent beyond their means.

Granted I realize that not everyone grew up in this environment. In talking with friends and family, it seems that there is a very negative attitude towards credit cards. Some of the things I often hear are: “Credit cards are evil”, “Getting multiple credit cards hurts your credit score”, “I hate debt”. These are just a few of the many sentiments I hear. I think the problem is that people stop there. They don’t actually do the research and put in the time to figure out what goes into their credit score or how to build better credit. There really should be a class in high school about Personal Finance and Credit that every teen is required to take.

Self-Control

Having a credit card takes self-control. While I may have a $14,000 credit limit on my credit card does not mean I have $14,000 to spend. I’ll say it again… just because I was approved for a $14,000 credit line does not mean I have an extra $14,000 to spend. This concept baffles me. There are thousands of people out there that view a credit card as additional capital to spend. It’s a trap! Don’t fall for it.

Tip #1: Pay Your Credit Card Bill Early and Often – There is nothing that says you have to wait till your due date to pay off your credit card spending. I typically send a payment BEFORE the STATEMENT closes. Why? Because most credit card companies report your % utilization to the credit report bureaus when your statement closes. For example, if I have a $1,000 credit line and I have $500 worth of charges when my statement closes, this means my utilization will be reported as 50%. However, if I make a payment of $250 BEFORE the statement closes, my utilization will be reported as 25%.

So back to my point about self-control. Never spend more than you can afford. The way I view credit card purchases is that it is money coming out of my bank account. It takes a while to form this mindset, but it is crucial to managing your credit.

 

The Earlier the Better

I wish my parents had added me as an authorized user when I was young. One of the factors that my credit score currently suffers in is my AAoA. Right now my oldest account is from 2010 (my first Discover credit card), but as I add more credit cards to my wallet, my AAoA goes down. If my parents had added me as an authorized user when I was 12, I could have had a really old account to balance out my average. I plan on adding my kids as AUs and tearing up the credit card as soon as it comes in the mail. As long as I make payments on time, these will help to build my kids’ credit scores.

Tip #2: Get a Card without an Annual Fee – These cards help to build your AAoA because you never close them and they never cost you anything. For instance, I’ve had my Discover More card since 2010 and it continues to report on my credit report even though I only put a few dollars on it once every three months. It is what I refer to as a “sock drawer” card. Since there’s no annual fee it is helping me build credit without any costs. I highly suggest getting a no annual fee card as your first credit card.

Get At Least 1% Back

There is a credit union that I have a checking account with and whenever I go in to deposit a money order they always try and get me to sign up for their credit card. I mean I don’t blame them the tellers probably get a certain amount of commission based on credit card approvals. What gets me is that they are trying to sell me on the %APR on the card. I could care less if a card is 2% APR. Since I’m paying my credit card bills in full every month I never deal with %APR. Furthermore, these cards come with no other rewards. If you look around you’ll find that most cards give you at least 1% back on purchases. Some will give you more based on the category of your spending. Good examples of this are the Chase Freedom and Discover IT cards.

So let’s continue with the assumption that most rewards credit cards give you at least 1% back. This means you spend $100 you get $1 back. Yes it may not seem like much, but if you use cash to pay that $100, you don’t get anything back. So why not, put the $100 charge on your credit card and use that $100 cash to pay off your credit card the next day? You effectively just earned $1 by changing the method you paid with. This may not seem like a lot, but these things add up. If you have $1,000 of expenses per month that can be charged to a credit card, you’re missing out on $10/month x 12 months = $120/year. That’s $120 that you’re basically leaving on the table, but wait it gets better. How you ask? Well there’s category bonuses, signup bonuses, retention bonuses. In pure cash back terms, you could save at least 1-2%. For instance, the Citi Double Cash card gives you 1% for your initial purchase and another 1% back when you make a payment. Furthermore, and this is the fun part, often times you can redeem points (Chase UR, Citi TYP, and AMEX MR, to name a few) for travel instead of cashback. This can double or triple the value. When I factor in category and sign up bonuses, I would say that on average I get about 4-6% back on purchases I make with my various credit cards.

Tip #3: Utilize Category Bonuses – See my post here about making the most of each card: https://milesfortwo.wordpress.com/2016/01/25/category-bonuses/

Don’t Bite Off More than You Can Chew

I’ll be the first to admit that this game is not for everyone. If you are living paycheck to paycheck or already in debt, you may want to start small. Learn to budget, get a secured credit card, pay off your debt, change your mindset about credit card spending. Once you have these things in order then you can enter the game of travel hacking.

Tip #4: Learn to Manage Your Finances – This isn’t something that will happen overnight. It takes practice and practice makes perfect.

Credit cards are not evil and if used correctly they can be a great way to save money or travel at a discount. The key here is learning how to manage and track credit card spending. Before applying for credit cards, I will often read hundreds of reviews, data points, and experiences from bloggers and friends about a specific card. Do your homework and it can definitely pay off.

  • Do authorized users build credit also?! I was under the impression that it was just the account holder since they are the ones held responsible for any activity/missed payments. For example, if I the account holder missed a payment, my authorized users wouldn’t have their credit score impacted (or vice versa.) Am I totally off on that one?

    • I think it depends on the issuer. For instance, I added my wife as an authorized user (AU) on my Chase Sapphire Preferred. The account showed up on her credit report and over the course of the past 6 months has had a positive effect on her report (since I have a pretty large credit line and kept my utilization low). I would assume if I had a negative mark it would also have an effect on her credit score (don’t really want to test it out).

      I know AMEX AU accounts will also report on your credit report. I don’t have any personal experience with this one, but I have heard of many people successfully doing it. I believe the term is called “piggybacking”. It used to be the case that AMEX would report the AU account as “opened” when the main account opened (even if you added the AU account a year later). AMEX caught on to people doing this and now report AU accounts when the AU account is created.

      On the flip side, I have friends who have successfully had AU accounts, that were closed, removed from their credit reports (in order to increase their AAoA).

      • That’s interesting! Any idea if they impact the account holder and authorized users at the same rate? Or is the authorized user impacted a little less (e.g. Would their credit score increase at the same rate as the account holder’s?)

        • I am not completely sure about this, but I would assume it would have the same impact. I could be wrong though. It is kind of hard to tell based on the credit report provided by http://www.creditkarma.com.