Credit Card Advice You Definitely Need
One of the financial side effects of the coronavirus pandemic was a good one: a drop in credit card debt. Americans went out less and spent less, and government assistance was effective enough that credit cards didn’t need to be a financial lifeline for some people. Credit reporting bureau Experian said balances fell 14% in 2020 — the first drop in eight years.
Maybe this is a good time to rethink some of what you’ve learned about credit cards and reset your mindset, no matter if you’ve been using cards for 40 years or four.
GOBankingRates asked professionals with experience in banking, credit and debt management for some advice to share about how to shed outdated practices and adapt to what today’s credit cards have to offer.
How Many Cards Should You Have?
In the third quarter of 2020, Americans had an average of 3.84 credit card accounts each, according to Experian. But what is the right number to have?
That depends on the person, their willpower and their financial ability to pay off the debt.
“There is no perfect answer because everyone’s situation is different,” said Andrew Lokenauth, a CPA and banking professional with more than a dozen years’ experience.
He recommends two, both with no annual fee: a cash-back card that repays you a set percentage of your spending year-round and another that gives you a higher percentage back on categories that rotate throughout the year.
Caleb Reed, founder of TheDollarBudget.com, had a slightly different take.
“If someone has a history of maxing out their credit cards, not making payments on time and carrying a balance month-to-month, they are better off with just one credit card or even none at all,” Reed said.
“On the other hand, if someone is very financially disciplined and always makes their payments on time and never carries a balance, it may be beneficial for them to have several credit cards to max out rewards and other perks.”
Limit Your Credit Card Applications
Applying for a credit card can result in a ding on your credit score, which for some consumers could have negative effects.
“While those with excellent credit may see no effect at all on their credit rating when they apply for a new credit card, most other consumers will see an average 1% drop whenever they apply,” said Todd Christensen, the education manager of Debt Reduction Services, a nonprofit firm. “That’s equivalent to about five to six points in the credit scoring range. For most consumers, applying for one or two accounts a year will have minimal impact on their credit rating. However, applying for three to five might actually drop your credit score 10 to 15 points, which could easily drop your score to the next credit rating tier, affecting your ability to qualify for reasonable interest rates and other repayment terms.”
Make Small Purchases
One of the ways to build your credit is to show how responsibly you manage the credit you have. That’s why it’s important to use your cards and pay them off. Christensen, who wrote “Everyday Money for Everyday People,” said that translates into a manageable amount each month.
“Not a single of the 134 factors in the FICO scoring model has anything to do with how many purchases you make a month or how big your purchases are. It just doesn’t matter,” he said. “I recommend making a single, small, set purchase each month with each card and then paying it off in full with your next bill.
“Great purchases include paying your cell phone bill, paying for Netflix or Disney+, or some other bill that does not vary from month to month. That way, you can binge-watch your ‘Game of Thrones’ all you want and still not worry about overspending on your credit card.”
Ditch the Store Cards
If you’ve watched enough “I Love Lucy” reruns, you know that Lucy had charge accounts at department stores, local boutiques and even with the grocer. (She ran up quite a bill!) Gone are the days you need all those accounts, from department stores to gas stations.
“Overall, I believe we are all better off with one or two all-purpose cards,” said Eric Klein, principal attorney with the Klein Law Group in Florida with an expertise in bankruptcy and credit law. “No longer do we need a gas card for gas or a department store card for clothing. Use just one card 100% of the time and carry a backup card in case of a problem with your primary card.”
Skip the Prestige Cards
While whipping out the most elite cards shows you’re somebody, stay away from the cards that have huge annual and even “initiation” fees. While the perks that come with some cards are insane, unless you live like a celebrity, stick with the many benefits that other cards offer to non-Kardashians.
“They’re status symbols and not for the average person,” said RJ (Rick) Mansfield, author of “Debt Assassin: A Black Ops Guide to Cleaning Up Your Credit.”
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