How to Credit Card

Three Credit Cards
Photo by Petr Kratochvil

If credit were as simple as cash, we wouldn’t need cash anymore.  Credit cards are very complicated sometimes, yet the fundamental financial skills needed to use them are not taught in schools or colleges.  Here are my secrets to success in managing credit accounts.

#1  Always have at least two credit accounts

This is the number one, most important lesson.  Credit cards help to establish your history of responsible borrowing, whether or not you use them at all.  For pilots especially, it’s a good idea just to have a credit card in the airplane in case of unexpected expenses while traveling.  And believe me, a credit card can stop working at any time for a wide variety of reasons.  Two “reliable” credit accounts is my bare minimum.  If one credit card is restricted to specific stores or small spending limits, then I need to have three cards or more so that I always have a fallback.

#2  Get your rewards

All the best credit cards put something back in your pocket when you spend money.  Rewards might be in the form of billing credits, gift certificates, or free air travel.  If you’re not getting rewards, it’s a bad deal.  Look into it.  Shop for what you like.  Don’t take bad deals.  Don’t open accounts that mention any annual membership fees.  If you are attending a flight school that accepts credit card payments, this will be a matter of hundreds of dollars in rewards!  Do the shopping before it’s too late.

#3  Rob’s Law of Increasing credit

There are three things that make your spending limit go up: 1. Opening new accounts, 2. Requesting limit increases, 3. Automatic limit increases that the bank initiates when it’s in a good mood.  The main rule of thumb is to ask for credit when you don’t need it.  If you max out your card and ask for a limit increase without paying off the balance, the bank is not going to be in a good mood.

#4  Rob’s Law of Decreasing credit

There are many things that might influence a decision to lower your spending limit, but there are only four ways that it can happen:  1. Closing accounts that you decide you don’t want anymore, 2. Automatic limit decreases that the bank initiates when it’s in a bad mood, 3. Account closures that the bank initiates after it lends too much money, 4. Account seizures initiated by the FDIC to protect customers of a failing bank.  The main rule of thumb is to leave accounts open and inactive if practical.  Once you close an account, it will bring down the average age of your accounts overall, and it will cause your debt-to-credit ratio to increase.  These are two of the most controllable aspects of your borrowing history.  The other three mechanisms that lower your spending limit are really out of your control.  Will the bank have a reason for limiting or closing your account some day?  Yes.  Will it be accurate or make any sense?  Absolutely not.  Don’t take it personally.  Banks just have their ups and downs!

#5  Plan on paying the balance down to $0 every month

Credit cards are called “revolving” accounts because the bank expects you to pay back what you borrowed every month.  If you don’t pay off the full balance before the due date, two bad things happen.  First, the bank starts charging you interest from the date of the purchase.  That means, on your next bill, you will see an interest charge even if you paid off the original purchase before the second bill was generated.

Secondly (this is where you have to be really careful) the bank will charge you interest again on the third bill.  Most credit card agreements say that the bank can charge you interest in any billing cycle where you didn’t pay the full balance of the previous billing cycle.  That means, when you don’t pay 100% of the balance by the due date, you give the bank permission to charge you interest on everything you buy during the second billing cycle, and that interest doesn’t show up until the third billing cycle.

In general, these interest charges mean there is no benefit to carrying a balance on the credit card.  In fact paying credit card interest can become significantly more expensive than alternatives such as loans or just not spending money.  But there are exceptions.  If a credit card has a reasonably low interest rate, and if there is a strong reason for avoiding a full payment, then it can be advantageous to stop making purchases, switch to a different credit card for a few months, and pay off the balance in two installments.  This strategy prevents the bank from charging interest on new purchases and minimizes the added expense in the second and third billing cycles.  There are also rare situations where the bank offers a discounted or zero-interest promotion during a limited time.  Be careful with promotions though; the zero-interest deals always come with fees attached, plus extra penalties if you don’t pay back on time.

#6  Always use at least minimum auto pay

One of the worst lessons to learn the hard way is what happens when you miss a payment completely.  The bank adds a big fee to the bill, around $25 or $50.  It’s like spending a bunch of money for no good reason.  The best thing you can do to avoid this problem is to have at least the minimum payment automatically paid every month.  Every credit company handles this service slightly differently, but it’s always worth the effort to set it up.

#7  Maintain a debt-to-credit ratio below 50%

This is a personal guideline.  I’m not afraid to use 95% of the limit on a single credit card, but I always stay below 50% overall for the total of my credit cards.  Anything above 40% will raise flags on a credit report.  If you routinely flirt with 40% or 50% or more and make responsible payments each month, then it’s time to ask for more credit!

#8  Never use an ID card as a credit card

The student ID credit card was a pet peeve of mine at college.  The university required everyone to present an ID card to check into buildings, and required students to have a MasterCard account connected to the ID unless they opt out.  Just say no to this.  Showing your credit card to people who should not have access to it in the first place is a really stupid thing to do.

#9  Being denied credit is good!

Sometimes it is difficult to deal with rejection or denial or failure.  This is not one of those times.  Being denied for new or existing lines of credit is good for three reasons:  1. It shows that you are developing a borrowing history and trying to reduce debt ratios, 2. Denials for new credit are not recorded in your borrowing history, and 3. Credit denials entitle you to benefits and bragging rights that you would not have otherwise.  For example, you might be aware that if you want to see your own credit report, you can get one free copy every year.  What most people don’t know, however, is that you are automatically entitled to a free copy of your credit report every time you are denied credit.  I encourage you to take full advantage of that.

Any time someone turns you down because of “information” they were given by a credit bureau, find out exactly what that information is.  You will see a few different thing happen.  Sometimes, at the demand for a written letter of denial, creditors will shut up and magically decide to reverse their decision.  Other times, you can get a copy of the credit report and find out the creditor was flat out lying about why they turned you down.  Last but not least, you might find something unexpected on your report that you need to correct before applying for credit again.  Don’t take it personally, this is just the way it works.

#10  Watch out for foreign transaction fees

Different banks and lenders impose a wide variety of fees if you use your credit card outside of the United States, even on the Internet.  In my experience, these range from 1% to 5%, but might also include a flat fee of $5 to $10 for every transaction.  The best way to avoid this is to call your credit card company, ask what the fee is, and don’t use that card for travel if the fees seem unreasonable.

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