Credit cards are a powerful tool that you can use to earn generous rewards and other perks, but only if you know how to beat credit card companies at their own game. With these Ten Credit Card Commandments, we explain how to stack the deck in your favor and explore some of the most common pitfalls to avoid.
1) Thou Shalt Not Spend More Than One Earns
The first commandment is at the core of everything that we preach at Cash Snacks, but it bears repeating in relation to credit cards. It’s easy to get carried away spending when that shiny new card arrives on your doorstep.
This is understandable. Credit card companies work tirelessly to coax consumers into spending as much as possible. Creative departments artfully design cards with enhanced aesthetic appeal. Partnership and rewards teams structure incentive systems that turn shopping into a game. Meanwhile, marketing departments tie it all together, building a sense of prestige and status around their cards.
None of this is inherently bad. I’m not here to make the case that card companies are evil conglomerates looking to ruin your financial goals. The key is understanding the tactics that they employ and behaving accordingly. Remember, card companies aim to fuel excessive debt-based spending. Their profitability and success is tied to the income they generate by charging consumers hefty interest rates.
Your job as a savvy credit card user is to hack the system. This means greedily hoarding rewards and perks. Keep an eye out for underrated benefits like cell phone insurance that can provide significant value to users.
The key is avoiding the temptation to overspend and inflate your lifestyle with credit card debt. Try to treat credit card spending the same way you treat cash expenditures. Studies show this is often difficult, but increased awareness can empower users to more actively resist this phenomenon.
2) Thou Shalt Never Carry a Balance
Commandment two goes hand-in-hand with Commandment One. Remember the hefty interest rates that we just mentioned? By paying off your entire “statement balance” each month, your credit card bill will never incur this interest. You’ll also avoid any additional late payment penalties or rate hikes.
It may sound simple, but the concept is powerful. This strategy allows you to capture all the benefits and rewards offered to cardholders without any downside.
Luckily, it’s also quite easy to implement this system with a simple tool called “Auto-Pay.” And if you’ve poked around Cash Snacks long enough, you know we jump at any opportunity to simplify or automate a financial process.
Thanks to the magic of technology, you’ll never have to think about Commandment Two again. All you have to do is log into your credit card’s website, link your checking account, and enable the Auto-Pay feature. Bear in mind that most card providers offer three different Auto-Pay options: full statement balance, minimum payment due, and other fixed amount. To avoid interest payments and other negative consequences that we’ve discussed, make sure to elect the “full statement balance” choice.
3) Thou Shalt Understand Rewards Categories
Extracting the maximum benefit from a diverse wallet of credit cards requires a basic understanding of rewards categories and structures. This knowledge will allow you to optimize every purchase that you make throughout the course of a day.
Once you study the rewards terms on each of your cards, reaching for the most optimal card will become intuitive. Unfortunately, it can feel daunting at first.
This is one of the reasons we preach holding a limited number of cards in Commandment Five below. Carrying fewer cards allows you to dig into the terms on the cards that you do hold and exploit them. For now, let’s break things down with a simplified example.
Example: Optimizing Credit Card Spending and Rewards
- John is a recent grad living in San Francisco
- He carries 3 cards in his wallet
- Travel Rewards Card – Yields 4x points on travel & dining expenses and 1x points on everything else
- Flat-Rate Cash Back Card – Yields 1.5% cash back on every purchase regardless of category
- Gas / Grocery Card -> Yields 5% cash back on any gas or grocery purchases and 1% on everything else
When thinking about a purchase, John should evaluate which card will provide the highest rate of rewards per dollar spent. Based on the criteria above, we can develop a basic rewards strategy for John to follow.
Sample Credit Card Plan
Clearly, he should use the third card for any gas or grocery purchases because of the 5% reward. This offer implies that for every dollar John spends on gas or groceries, he will only have to pay 95 cents (after redeeming his cash back). That can add up quickly!
It’s also apparent that anytime John books a trip or heads out to eat that he should use the first card. He can earn 4 points for every dollar that he spends. Credit card points aren’t quite as straightforward as cash back, but they can often be redeemed for future travel, gift cards, online shopping, etc. Sometimes they can also be converted into airline or hotel miles which may stretch their value even further. The nuances around card points are beyond the scope of this post. For now, just focus on the 4x multiplier provided to John on travel and dining purchases.
So John knows how to handle travel / dining and gas / grocery expenses. But what about everything else? Here’s where things get interesting.
It’s likely optimal for John to put miscellaneous purchases on the flat-rate 1.5% card. However, you could also make a case for the travel card. The decision hinges upon the ultimate value that those points fetch when they’re redeemed. If you’d like to dive into this rabbit hole, there are thousands of blogs dedicated solely to this topic. For the less ambitious among us, just grab the flat 1.5% cash back and move on with life.
4) Understand Credit Scores and Strive to Increase Thy Score
A credit score is a numerical value that helps a lender assess a borrower’s creditworthiness. A higher score implies that a borrower is more likely to use debt responsibly and repay on time. Borrowers with strong credit scores gain increased access to larger amounts of debt at more favorable interest rates. Alternatively, borrowers with lower scores appear riskier. A lower score might lead lenders to structure a financing package with higher interest rates and more restrictive terms. In a worst case scenario, lenders could decline to extend any credit at all.
So how are these scores determined? And how can we raise them? There are five key categories to consider. Let’s cover each briefly.
Payment History
This one’s pretty self-explanatory. Banks and other lenders check into a borrower’s past and use previous borrowing behavior to predict future creditworthiness. If you’ve always paid debts on time, this will enhance your credit profile and instill greater confidence in your prospective lender. Alternatively, if you have a rocky history filled with late or missed payments, lenders will feel less comfortable extending credit. To compensate for this risk, your credit score will be docked, and you’ll likely pay higher interest rates or receive a lower credit limit.
It strikes some people as unfair that past credit activity dictates future credit privileges. Perhaps you lacked an understanding of the credit system. Or you ran up huge card charges as a teenager before grasping the consequences of your actions. While it may be an imperfect system, you can’t change the past. The good news is that you can commit to making a positive change in the future…and this matters in the eyes of lenders! The more time that passes after a late or missed payment incident, the less impact it has on your score.
Amounts Owed
Creditors also look at the total amount of debt that consumers have outstanding. But it’s not necessarily true that a large amount of debt outstanding negatively impacts your score. After all, you could manage money quite responsibly while carrying substantial student loans or mortgages on an investment property.
The key to understanding the amounts owed category is a concept called credit utilization. This term describes the ratio of funds that a consumer borrows versus the total amount they are permitted to borrow on revolving accounts (like credit cards). For instance, let’s say you have a $10K credit limit and you spend $8K in a single month. Your credit utilization is 80%, as you have used 80% of your total available credit.
So what constitutes a high credit utilization rate? There is no definitive threshold, but 30% is a safe rule of thumb to follow. Anything higher than this causes lenders to begin to question whether you’re undergoing financial duress leading to a potential credit score reduction.
Length of Credit History
The average age of credit accounts and age of your oldest / newest accounts also have an impact on your overall score. The longer you’ve established yourself as a responsible borrower, the higher your score will be since you appear more stable and attractive to lenders.
This is one of my least favorite credit score factors. It’s largely out of your control and tends to discourage young borrowers.
Unfortunately, as is the case with many things in the world of personal finance, there is no substitute for time and patience here. You can’t accelerate the process or cheat the system. Luckily, if the rest of your credit profile is strong, lenders are often willing to look past a shorter length of credit history.
Credit Mix
Credit mix refers to the different types of loans that a borrower holds and manages. Different types of debt might include credit cards, mortgages, car loans, student debt, etc. Generally speaking, the more types of debt that a borrower uses responsibly, the higher their credit score. All else equal, lenders look favorably upon those that are able to manage different types of debt as it demonstrates greater financial literacy and experience. With that said, it is not advisable to apply for excessive credit with the sole purpose of increasing credit mix. Not only will it add greater complexity to your financial life, but as we’ll see next, applying for new credit can negatively impact your credit score.
New Credit
When you apply for a new line of credit, lenders will run a hard inquiry which allows them to analyze your credit score and record. This helps them make an informed judgement about your creditworthiness. The inquiry stays on your credit report for at least two years and your score will take a minor hit after the inquiry is pulled.
Excessive inquiries will sink your credit score, providing lenders with the impression that you’re experiencing financial trouble or uncertainty. While you want to avoid excessive inquiries, this temporary reduction in your credit score should not discourage you from applying for all new debt. In moderation, new credit applications only result in a temporary credit score ding, and the increased access to a more diverse mix of credit will help your score based on the factors we mentioned above.
5) Thou Shalt Not Carry More than Five Cards
K.I.S.S. Keep it simple stupid. That’s what Commandment Five is all about.
There are some folks who simply love playing the credit card game. These are the types who will spend sleepless nights agonizing over whether to convert rewards into Delta SkyMiles or Marriott points. They’re often armed with spreadsheets and point conversion charts. They can quote your favorite travel hacking blog by heart.
I’m not necessarily against this approach for those that embrace the lifestyle. I love a beautiful spreadsheet as much as the next former investment banking analyst. However, for the vast majority of people I think simplicity trumps absolute optimization.
My Simplified Credit Card Plan
With a few carefully selected, versatile cards that provide rewards across the primary spending categories, you’ll be destined for success. I personally carry just two cards in my everyday wallet: the Chase Sapphire Preferred and the Capital One Venture. (Note: CashSnacks.com will receive bonus credit card points if readers sign up using one of these links.)
I use the Chase card for any dining / travel purchases and the Capital One for everything else. Could I earn a couple hundred bucks more in rewards by applying for 5-6 additional cards and aggressively “hacking” my spending to maximize my benefits? Absolutely. Do I think this payoff justifies the time and effort? I don’t.
Rather than spend my time trying to optimize every cent of rewards, I choose to use this time for activities that I consider to be more valuable (relaxing with the people I love, learning about real estate, writing for this blog, exercising, etc.)
Keeping things simple with Commandment Five also means less accounts to track, manage and monitor. Once you’re using more than five cards regularly, logging into many separate accounts to monitor spending and avoid missed payments becomes cumbersome. Remember, you only win with credit card rewards if you pay off your balances in full and on time. The moment you forget to make a payment and incur interest and fees, you have lost the game. A smaller portfolio of cards will help you remain vigilant and avoid costly oversights.
6) Thou Shalt Always Earn the Signup Bonus
When I opened my first credit card, the signup bonus sounded overly generous. “Spend $1,000 in your first three months and earn 30,000 points!” The thought of spending money that I would’ve spent anyway and receiving a large amount of rewards points for the act just didn’t seem possible. There had to be a catch. So I opened my first credit card and hardly used it.
Truth is, card companies must compete ruthlessly against eachother to win consumer business given the abundance of cards in the market. If you select the right card, you can find valuable signup bonuses that prove to be as attractive as they appear.
As a result, you should do whatever you can to reach the spending thresholds required to earn these generous bonuses. And while I know some may think this is a ridiculously obvious statement to make, it wasn’t obvious to me when I started my own credit journey!
Timing your Credit Card Applications
To facilitate the process of earning your signup bonus, I recommend timing new card applications around life events. For example, if you’re moving to a new city, having a child, getting married or starting a new school year, you can reasonably expect that your spending will spike around these moments. Your spending habits are easier to predict than you think. Use this awareness to your advantage and capitalize on increased expenses by opening a card with a great signup bonus.
As always, remember that every ounce of benefit is eliminated if you fail to pay off your full statement balance every month. The card companies hope to entice you with lucrative initial benefits while profiting handsomely on the backend by charging high interest rates. Refer back to Commandments One and Two, and avoid spending more than you have or carrying a statement balance. Do this, and you’ll reap all the benefits without any downside.
7) Thou Shalt Never Open a Store Card
This one might seem random, but cards affiliated with retail stores are notoriously terrible. Retailers love to bait unassuming shoppers with access to “exclusive cardholder sales” and other flashy perks, but this is marketing fluff.
In reality, these cards offer limited flexibility and many of the exclusive sales events aren’t actually exclusive. Given the proliferation of the internet and digital commerce, if you price-shop aggressively enough online, you can often beat any promotion offered “exclusively” to retail cardholders.
Even worse, these cards offer terrible rewards categories and structures. You’re essentially forced to shop at a single store to earn any sort of meaningful benefit. Then, the only place where the points may be redeemed is at the very same store.
As we’ve discussed, there are increasingly attractive rewards and flexible options in the market today. Cards such as the Citi Double Cash Card provide 2% cash back on every single purchase you make. That’s like a 2% discount on your entire life! Nevermind cards like the Chase Sapphire that allow you to convert points earned into anything from airline miles, to free hotel stays to Amazon gift cards.
Embrace the fact that credit card companies must compete for your business like never before. You can’t afford to settle for a store-affiliated card with so many more attractive offers in the market.
8) Thou Shalt Contact Card Companies Frequently
You should aim to be on a first name basis with your credit card providers. As ridiculous as this might sound, the benefits of frequent contact are undeniable.
What most people don’t realize is that any fee is negotiable in the world of credit cards. Late fees, interest charges, annual membership dues, foreign transaction fees. They can all be waived if you approach company representatives in the right way. Due to extreme competition between card companies, most are way more willing to negotiate than you realize. Many folks simply feel too scared or embarrassed to pick up the phone.
If you ever incur a fee, call and contest it immediately. I’ve done this numerous times and I’ve seen positive outcomes on more than 80% of those instances. Think about the economic incentives at play. It costs a card company significantly more to acquire new customers than it does to waive a few measly fees in the hopes of retaining a loyal customer.
Personal finance blogger and negotiating wiz Ramit Sethi has even published a field-tested script to walk you through the process. Take advantage and make it a goal never to pay avoidable fees again.
9) Thou Shalt Avoid Excessive Credit Card Applications
We mentioned this in Commandment Four, but it’s worth exploring in further detail.
Your credit score suffers a slight ding each time you apply for a new card. The card company must run a hard inquiry where they pull your full credit report and make a judgement about your creditworthiness. This is a streamlined way for them to objectively analyze all the risk factors and trends shown in your credit history.
If you meet their borrowing requirements…congrats a new piece of plastic will be headed your way. If not…better luck next time.
But what’s guaranteed is that your credit score will fall a few points each time you face a hard inquiry. Perhaps you’re starting to sense the dangerous cycle this can initiate. Let’s look at a brief example.
Example: How Excessive Credit Card Applications Create a Vicious Cycle
Let’s say you’re excited by this post, and apply for five different credit cards tomorrow. You almost qualify for all of them, but your credit score is slightly below the card companies’ minimum threshold. So you’re zero for five on your first credit card applications.
Bummer, but you’re determined to persevere. You apply to five more cards the next day that seem to have slightly looser credit standards. Unfortunately, all of the hard inquiries from your first batch of applications have lowered your credit score even further. Now you don’t quite meet the requirements for any of the cards that you applied for in your second round.
And this cycle could theoretically repeat itself many times over as you continue to fall below minimum credit standards and further wreck your credit score.
It’s important to be deliberate in your card selection and application process. Only apply for a card that you feel (A) you have a strong shot at being approved for and (B) provides a rewards program that aligns with your spending patterns. The last thing you want is to create a vicious cycle of applications that leaves you without any new cards and a lower score to boot.
10) Thou Shalt Actually Use Credit Card Rewards
Finally, Commandment Ten reminds us to enjoy the full benefits of credit card rewards and perks. After all, we didn’t do all of this work for nothing!
Users who fail to reap the full benefits of their rewards generally fall into two camps. The first camp is made up of the compulsive credit card super-users that we mentioned in Commandment Five. These folks grow so obsessed with optimizing point redemptions and timing mileage conversions that they fail to take action. Stuck in analysis paralysis, these cardholders wait endlessly for that perfect moment to redeem while their points lose value by the day. Just like inflation weakens the purchasing power of cash that sits in a checking account, points grow less valuable over time. It’s almost always more beneficial to use them in the near-term rather than waiting for a “perfect” deal that may never come.
The second camp is filled with those users who don’t understand card rewards or simply don’t care. I’ve met countless people who sit on thousands of credit card points or cash back credits that they never even knew they had. These people generally assume credit card companies are predatory by nature and avoid interacting with them at all costs. While this skepticism towards card companies and disinterest with rewards minutiae resonates with me, I can’t endorse leaving benefits on the table! It’s free money! Take an hour to orient yourself to your card provider’s site and mobile app. This will allow you to redeem rewards at the click of a button moving forward.
Key Takeaways
There you have it. Follow these Ten Credit Card Commandments and you’ll maximize your chances of winning the credit card game. While none of these points are inherently difficult to implement, they’re not necessarily intuitive either. And remember, you don’t need to be a master to get started. Stick to the basic principles below, and everything else will fall into place.
Spend less than you make and avoid carrying a credit balance. Monitor and understand your credit score. Take full advantage of card rewards and simplify your life by holding less than five cards total.