5 Rules of Credit Cards
LearnVest Founder and CEO Alexa von Tobel is our newest Entrepreneur in Residence, and this month she’s weighing in on the importance of using your credit card—correctly.
When it comes to your money, you have a lot of tools to work with, from budgets to investment accounts. But one of the most important tools to master? Credit cards. To help make the most out of yours, I’ll break down some of the key rules to keep in mind.
Rule 1: Find the best card for you
Whether you’re applying for your first card or just deciding which of your cards to use on a purchase, not all cards are created equal. If you’re in need of a starter card or have just suffered a financial blow (like a bankruptcy), a secured credit card may be right for you. A secured card is tied to a security deposit, so it can help you build your credit from scratch. If you have good credit and are in the habit of paying your balance in full every month, look into rewards cards. By doing your homework, you can find a rewards card that relates to the types of purchases you make most often. Jetsetter? Consider an airline card. Frequently on the road? Try a card with extra cash back on gas. You can research and compare cards at sites like Bankrate.com and CreditCards.com. Make sure to keep an eye on the APR (read: the interest rate) and the annual fee (if there is one).
Rule 2: Apply in moderation
Before you start applying for every card out there, note that each time you apply for a card, it triggers a “hard inquiry” on your credit score. When you get a bunch of inquiries into your credit at once, it suggests that you’re in dire need of credit and that can actually lower your score! We generally recommend that you apply for one, wait to see how it goes, and then go from there. Plus, if you’ve followed the rule of doing research before you apply, you’ll hopefully apply for a card you’re more likely to be approved for in the first place!
Rule 3: Create a safety net
The “danger” of using a credit card is the potential to rack up credit card debt. The average American household has over $15,000 in credit card debt. At LearnVest, we typically see people get into credit card debt for two key reasons: they did not have a budget that fit their lifestyle, or an emergency hit and they had no cash on hand to cover the cost. That’s why we recommend our One Number Budget Strategy, which puts your goals—like credit card payments—first. It’s designed to give you just one easy spending number to track each week. It’s also why we prioritize creating an emergency fund, so you have that extra cushion to help pay for any curveball that comes your way. A solid emergency fund should have at least six months of your take-home pay stocked away in a savings account, where it’s easily accessible.
Rule 4: Be smart about payments
It may seem obvious, but it must be said: We recommend that you pay off your credit card in full each month. I’ve met too many people who think carrying a balance is good for your credit score—that’s a myth! No matter how much you’re able to pay, it’s critical that you never miss a payment. Missed payments can have a very negative impact on your score. There are simple ways to avoid this pitfall, like setting up calendar reminders so a deadline never slips your mind. Lastly, if you’re carrying credit card debt, consider making payments twice a month. Credit card interest actually accrues daily, so making more frequent payments can save you some interest.
Rule 5: Don’t close your oldest card
One of the things your credit score is based on is the length of your credit history. Think of it this way: The longer you know someone, the more likely you are to know whether you can trust them. Potential lenders like to see as long a history as possible. Consider using your oldest card for a small purchase every once in a while, just to keep it active (and be sure to make the payment). If you do need to close some old accounts (perhaps one with a high annual fee), we recommend closing no more than one per year. If you have a few that need to go, simply set a calendar reminder to close those additional cards down the line.
For more from Alexa, read her posts on Finance 101 and A Beginner’s Guide to Investing—and visit her online at LearnVest.com.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.
Editor’s Note: We’ve long loved Alexa von Tobel. She’s everything you imagine a financial planner is not—playful, witty, incredibly stylish—and it’s this in part that has made her company, LearnVest, such a massive success. Alexa has a way of approaching financial matters with a comfort level that demystifies oft overwhelming topics like budgeting, debt and retirement planning. We featured Alexa in the launch video for our #WomenWhoWork initiative and we’re thrilled to have her join us now as our newest Entrepreneur in Residence.