Credit Card Use: Best Practices

Credit cards are all the rage! We’ve all seen or even known people who hack all the best rewards to go on extravagant vacations, or buy luxuries things, they wouldn’t normally be able to afford. Back when we discussed savings, I had mentioned that chasing rewards from checking accounts can be a futile battle. For many people, your energies would be better off spent getting rewards with credit cards.

In classic SDB fashion, I would be remiss not to throw a warning your way up front. Forbes is reporting that the national credit card debt in America reached $1.14 trillion in 2024… That’s TRILLION, with a “T”! That’s beyond even Dr. Evil’s wildest imagination! The article goes on to state that the average consumer credit card balance more than $6k! The average credit card interest rate approaching 30% (28.65% as of 11/2/24 according to Forbes), remember when I mentioned that 8% is what I would consider high interest debt? Anything over 20% is blasphemous and needs to be tackled immediately!

Almost 50% of Americans have carried a credit card balance in the past year. This 20%+ interest is actively working against your financial health and most likely other areas of your 5POH; PLEASE take it seriously! I cannot understate how badly these stats irk me.

All of the warnings being said, credit card use on regular purchases have some significant benefits. Proper credit card practices will raise your credit score, allow for flexibility/protections on purchases, and (everyone’s favorite) THE REWARDS! Let’s review some of the best practices for the Savvy Solo to maximize the value here.

Is good ol’ Uncle Bill off his soap box yet? Nope!

Notice I said to pay the balance “in full” each month. Every credit card statement has a “minimum” payment that will appear on your bill. You can pay this minimum with little to no effect on your credit score, but incur the 20%+ interest. This is a trap!

Let’s just say you moved to a new apartment and decide to buy a new $1,000 couch. Moving was expensive, so you’ll throw it on the credit card, and worry about everything else later. We’ll be extremely conservative here and say that the interest on your card is 20%. The bill comes in the mail, and the minimum payment is only $25, what a sweet deal!

If you decide to pay the $25 per month each month, it will take you (drum roll please) 5 years and 3 months to pay this off in full! Not only that, but over this time you would have paid $1,610.79! What are the chances you still even want this couch in 5 years? Let’s hope it’s one of those rare couches that grows in value over time!

The point here is that you shouldn’t use a credit card on anything that you don’t already have the cash to pay for. There is no bonus or reward that will account for that 20% interest rate working against you.

Heaven forbid you miss the payment all together, you’ll get slapped with late fees on top of all that! Let’s say the due date comes and goes, you slipped your mind and paid the bill in full a couple days after it was originally due. You’ll have the late fees, and (luckily) only a few days of interest to pay up. Here’s the sneaky thing about credit cards, many of them will charge you interest on the items you purchase for the remainder of that month. This is really important so let me say it again:

Many credit cards will charge interest on new purchases even if the previous late payment was made in full!

Yes, credit cards are out to get your money. Some would say capitalism at its finest. These fees, interest rates, and the transaction fees put on vendors are how these credit card companies are able to offer such great promotions and rewards. This brings me to my next point…

Don’t let the reward tail wag the dog!

We previously discussed never letting the tax tail wag the dog, same principle applies here. Most credit cards out there are offering rewards of 3-5% of purchases. Some will offer as high as 10% on certain purchases. None of that matters if you incur interest rates and/or fees north of 20%.

Credit cards are best utilized on purchases you were going to make regardless of the bennies. Don’t be on the wrong side of the statistics above. Pay the credit card statement in full each month to take full advantage of the opportunities they offer.

I hesitate to offer this suggestion, but 0% balance transfer cards legitimately can offer a quicker way to pay down existing credit card debt. There is usually a fee of 3-5% of the transfer associated with this move however, so do the math and see if it makes sense for you.

Balance transfer cards come with an interest-free introductory period, usually around 6-24 months. Normally the transfer comes with the agreement of making on time minimum payments (along with the transfer fee added on to the balance), or else you can be subject to penalties. Also, new purchases on this card will be subject to high interest rates (not the 0%), which completely negates the benefit of its use.

Let’s say you have $10,000 of credit card debt at 25% APR, with a plan of paying $550 per month. Right now, your plan to pay this off will take 24 months and cost $2,699.06 in total interest 😬. Instead, if you found a good deal for a 0% balance transfer, you would pay $300 for the transfer fee and pay off the $10,300 in full in 19 months. The Savvy Solo using this method would want to really focus their freedom $ in this direction to aggressively pay it down as soon as possible.

One of the pitfalls of this method is that some people tend to do this transfer over and over, incurring new transfer fees each time. After numerous moves like this, it could negate the financial purpose it serves in the first place. Making the transfer happen might be a smart move depending on your situation, but you still haven’t made any real headway yet. If you miss a payment, you could have the promotional 0% interest rate revoked, often leaving you with a higher APR % than you were originally dealing with 😓.

Keep your head down, and power through this debt as diligently as possible. While working this process, it’s in your best interest to cease all credit card use for now.

A chunk of your credit score rating is based on how much of your credit you are actively using. For example, if you have one credit card with a limit of $5,000 and make a purchase for $500, you have utilized 10% of your credit.

The savviest of solos out there will be able to keep credit utilization under 10% at all times for the best impact, but the general rule of thumb is to never go above 30%. Your credit card company will report your credit utilization once a month to the credit bureaus. The tricky part: there’s no telling what part of the month is going to get reported.

This means that it is in the Savvy Solo’s best interest to have credit limits totaling above 10X their standard monthly credit card purchases. The credit bureaus are looking at credit utilization as a whole, so you can get to this credit limit using multiple cards if needed.

Let’s say Jerry generally spend $2K monthly between his two credit cards. Currently his credit cards have $3K and $3.5k credit limits respectively. There’s a chance the credit cards could report that he utilized a total of $2,000 of his total $6,500 credit; thus putting his reported credit utilization at 30.77%. Now Jerry’s credit score is going to get dinged despite responsibly paying it in full and on time.

Going over 30% credit utilization on occasion isn’t going to kill you. It will create a temporary dip in your credit score that will be recovered with good credit card practices moving forward. That said, Jerry would be wise to try to get more credit. I would recommend Jerry first contact his current credit cards to see if they can raise his credit limit, most of them will via a simple phone call (assuming his credit score is in ok shape). Next, if his credit limit still isn’t high enough, Jerry might consider applying for a new credit card.

I made this mistake a while back, but it’s not the end of the world.

Canceling a credit card can have negative implications on your credit score, part of your score is based off the length of your credit history. By choosing to close a credit card, the average length of your credit lines gets shortened, thus shortening the average timeline on your open lines of credit.

The reason I closed this particular credit card was that it had an annual fee, and I had just opened a different credit card with better cash back deals and no fee. The Savvy Solo in this case should have called the original credit card company to move that line of credit to a card that has no annual fee. At that point put the new card with the moved line of credit in a drawer somewhere, no need to keep this one in the wallet. The original line of credit will continue to be the same age.

There’s a chance the credit card company will want to close accounts that go for a long period without being used. The Savvy Solo would either use this line of credit to make a small purchase every 6 months or so to keep it open; or decide to let them close it and open a new credit line that will bring more rewards from current purchases.

Credit utilization and credit age of accounts are both accounted for in your credit score. The Savvy Solo will have to weigh these along with potential rewards to determine which credit cards will bring the most value to their life.

This is only a suggestion for those that are not working their way out of credit card debt. It’s something of a next level strategy to assist in getting maximum rewards and improve the credit score. Let me say that again:

This strat is only for responsible credit card users not carrying a balance!

The true credit card hackers out there have something like 10-15 credit cards 😨. They have spread sheets, several phone apps, and labels on their credit cards to determine which one to use on a particular purchase. Every time the bill at the restaurant comes, or at the register in the movie theater, it becomes a math equation of which card is bringing the most points or cash back.

Not only is it creating confusion at purchase time, the credit card hacker is going to need to come up with a plan to pay each and every one of these cards on time each month. These due dates could be sporadically through the month, making it easy to miss one. A late fee would set them back, thus needing more rewards to make up for it, and the vicious cycle begins.

These hackers are also spending an unprecedented amount of time keeping all this organized in a way that benefits them the most. How much of this time could be spent earning real money instead of earning a $5 bonus reward on an amusement park? I’m not discounting the true art of optimizing every opportunity, but in general I revert to keeping things simpler.

Instead consider what recurring bills and purchases you are already making each month. Everyone eats, why not a credit card that offers cash back on grocery store purchases? If you drive a lot, consider a card that offers bonuses on gas purchases. We all shop online, plenty of cards out there will offer points for online vendors. Travel cards tend to offer the best bennies, but know the rules and how to direct these purchases before diving in.

There are several cards offering 2% cash back on all purchases. These are excellent starting points for anyone new to the credit card game and will always be useful on the “gap” purchases where the other cards in your stack don’t offer rewards. There are also rotating category credit cards that are a little difficult to keep on top of but can really offer better than average benefits when used properly.

The Savvy Solo will identify a few credit cards that will get them rewards based off their current purchases. Try not to get so caught up in chasing rewards that you start making purchases you otherwise wouldn’t. Don’t let the tail wag the dog, remember? Also, don’t open up 4 cards at once, ease into it. Not only is this best practice for you, a number of new credit lines all at once will set off alarms at the credit bureaus and can negatively impact your score.

Once you have identified the cards that will benefit you the most, try to set the due dates up all on the same day. Usually after a month of having the line of credit open you can ask for the due date to be changed. This not only simplifies things, but it will also be easier to remember that the 15th is credit card day each month. Set up alarms on your phone to help remember if needed. Don’t forget, this is all for naught if you incur a late fee.

Automation is what will create the most benefit for the least work, but I discourage people from setting up automatic payments on their credit cards. It’s worth the time to look at your purchases once a month. If it’s completely automated, you might not even realize how much you spent in a particular month and run into trouble if it’s too high. Instead set up automatic payments to your cards on monthly fixed bills, for example internet and cell phone services. This will ensure the payment comes from the correct card each month with no time spent on your end. It’s worth noting here that everyone should make sure there aren’t extra fees for paying by credit card on any of these services.

Having credit cards on you, along with your debit card, will also allow you to have multiple payment options for the vendor you are purchasing from. This restaurant doesn’t accept AMEX? No problem, you have a VISA that gives you 2% back on everything. It’s also a good idea to keep a small amount of cash on you in case you run into a vendor that charges 3% fees for card use.

The credit card game can be a fun but dangerous adventure. To quote one of my faves, Brian Preston from the Money Guy Show, “Credit card use? Ok. Credit card debt? No way!” Responsible credit card use has multiple benefits, but don’t let the tail wag the dog!

Just to recap, here’s a few dos and don’ts when it comes to credit cards:

DO:

• Pay your balance in full on time each month
• Consider a balance transfer on existing credit card debt
• Find credit cards with rewards that match your current purchases
• Have credit limits totaling over 10X your standard monthly purchases
• Set up automatic payments through cards on fixed bills that don’t incur fees

DON’T:

• Use credit cards when carrying a balance
• Put anything on a credit card you don’t currently have the cash for
• Use any credit card you accidentally paid late for one month
• Go over 30% credit utilization
• Cancel old credit cards
• Set up automatic payments on your credit cards
• Try to be a credit card hacker overnight
• Let the tail wag the dog!

If you aren’t a person that gets true joy out of playing the game and maximizing rewards, keep it as simple as possible. As of November 2024, I currently only have two credit cards, and I only keep one of them in my wallet. That might change in the future, but my focus is primarily on tackling debt at the moment. At some point it might not make sense to spend all this time getting points, when you could be spending that time on things that bring real value in your life.

I implore you to take another look at the statistics up top. Almost half of Americans have carried a credit card balance in the last year. There is no shame in avoiding credit cards. Not to get all Ramsey on you, but clearly more people should be considering this. Know thyself and proceed with caution.

The Savvy Solo will be able to utilize these opportunities responsibly. In the future I’ll post about my favorite credit cards, but for now I’ll leave the research up to you 😁.

Stay classy Solos! ✌️