Credit Cards

Credit cards, as with other types of credit, are a tool. Use them to help *you*, not the credit card companies.

The first is pretty obvious: If there is any danger of you not being able to pay your bill in full by the time interest becomes payable, don't use the card. 20% interest will break your budget in no time flat - it is a disaster, and should be avoided at all times.

Second, don't get cards that cause you to spend more than you would otherwise choose to. So for example, there is nothing wrong with getting a Hilton-branded credit card that gives you deals on or free nights at hotel stays. But if it means you end up staying at much more upmarket hotels than you would normally just to get the points...

I have so far gone for cash back type cards, where there are few to no hoops to jump through in order to get your rewards.

Third, use the right tool for the job. If you buy things from overseas, make sure you get a card that has zero percent forex (foreign exchange) fees and use it for those purchases. If you buy online, use a card that has warranty extension. Or for car rentals, flights and hotels, look for cards with insurance built in.

Fourth, fees. There is nothing wrong with paying for a credit card - if it's worth it. For example, there is a good free 2% gas/groceries credit card, and one that costs $120 but gives 4% cashback. For that extra 2% to become worth paying the $120 for, obviously you need to spend enough to get you that $120 back! And in this example, that means a total of $6000 *in those categories* a year.

As you might've guessed, I'm not a big spender. Our household spends much less than the $500 a month needed to make the fee-based card worth it. The card in question *does* come fee free for the first year, and with a cash signup bonus too, so I may go for it at some point.

There have been many articles written about credit scores, but the gist is this:

There are 5 categories that make up the score

35% payment history - if you make your payments on time, full marks. Always pay on time!
30% payment utilisation - this is the percentage of your available credit that you are using. It is based on when the credit issuer reports to the credit bureau (ie, your *bill*, not whether or not you carry a balance). More than roughly 30% utilisation will bring down your score.
15% length of credit history - having had cards for years is good. Closing those accounts is bad.
10% types of credit - credit cards, lines of credit, auto loans, instalment loans...
10% 'new credit' and enquiries - each time you have a 'hard hit' on your report, it knocks your score a few points. Lots of hits in a short time multiplies that effect. But, shopping around for mortgages in a short period gets amalgamated into one hit

Before doing a *big* application (mortgage), it is worthwhile keeping your score as high as possible by not applying for new cards, making sure your utilisation is as low as possible, and so on. Once your score is high enough, though, it simply doesn't matter - all applicants above a threshold will get the best mortgage rates.

Anyway, back to credit cards as tools. I carry the following:

A card with good cashback on gas/groceries
A card with zero forex fees
A card for other situations

It just so happens that these three cards are on the three different networks (VISA, MasterCard, American Express), so in the case that only one type is accepted I am still covered.

If you have old but unused cards, keep them - use them occasionally so they don't get closed - but keep the account open, as it does help your credit score. Alternatively, see if you can upgrade them to a different product that is more useful to you.

Hint: 1% should be the minimum reward target. There are cards that give 0.25%, 0.5% but there is no good reason to go with them - as 1% cards are plentiful. I will go through churning, app-o-ramas and so on in another post.

And to recap - credit is a tool. There are lots of fancy cards out there (just as there are lots of fancy trucks!), but that doesn't mean you should use them. Your financial health - and your early retirement - depends on you using them when appropriate, but keeping your wallet closed otherwise!