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Radically Re-Thinking Credit Cards: Part Two

Yesterday, I recommended a new way to pare down your credit cards. I don’t want you to cancel them all or use them like crazy to earn rewards. I just recommend keeping two credit cards—the card you’ve had the longest and the card with the highest credit limit. For simplicity (and to protect yourself from going on a spending binge and landing in debt), cancel the rest.

But as one person already commented—banks will cancel your credit cards if you don’t use them. Because you want to keep at least two credit cards open to continue building credit, you want to make sure the two cards you keep stay open. So you should use them from time to time.

Re-Think Your Credit Cards! from David Weliver on Vimeo.

What Credit Cards Do Best

The real argument for spending with a credit card instead of a debit card or cash is not the rewards you’ll earn. As I mentioned yesterday, credit cards play with your psychology and actually make you spend more than you would with cash. The real benefits credit cards offer that you can’t get from other payment methods are:

  • Fraud protection
  • Leverage in disputes with merchants
  • Travel insurance and convenience

Credit cards are better for fraud protection because if they’re stolen, the most you’ll be liable for is $50. Plus, if somebody makes fraudulent charges, it’s not your money they’re stealing; it’s the bank’s. Also, if you make a purchase with a credit card and the merchant ends up charging you too much or doesn’t fulfill its obligations, the credit card company can help you dispute that charge. In many cases, you won’t have to pay the charge until the issue is resolved. If you had paid cash and gotten ripped off, your money is already long gone.

Also, most credit cards provide some minimal travel insurance programs. If you book air travel with a credit card and the airline damages your baggage, your credit card may cover some of the loss. Ditto for car rentals. Rent a car with a credit card, and the card provides some level of additional insurance if you bang up the rental.

Last but not least, credit cards are far more convenient than debit cards or cash when you travel. Hotels and car rental agencies need deposits—sometimes several hundred dollars. With cash or a debit card, you actually need to give them this money up front. With a credit card, they just put a hold on a portion of your credit line; you never have to part with any of your money for the deposit.

How To Use Your Two Credit Cards

With some of these benefits in mind, here’s how to best use the two credit cards you keep open. Use the card with the higher credit limit for:

  • Big purchases, say over $100
  • When you travel

You’ll protect yourself when you make big purchases and it’ll be far more convenient to travel. You may not use the card every month, but you should use it enough that the bank won’t cancel your card. Of course, pay the card in full every month.

Use the second credit card for a few fixed monthly expenses. I recommend setting up your card to automatically pay a few monthly bills, such as:

  • Your gym membership
  • Your cell phone bill
  • Your car insurance

You’ll pay one bill every month instead of three, and you’ll be keeping that card open and building credit at the same time.

Re-Cap

So between yesterday’s post and today, I’ve laid out my new strategy for using credit cards minimally and wisely. The strategy is this:

  • Cancel all but your oldest credit card and the card with the highest credit limit
  • Use one card for big purchases and travel
  • Use the second card for a few recurring monthly bills

What do you think? Good idea? Do you want to scream at me for suggesting people still use credit cards at all? Think I’m stupid for not recommending people take more advantage of rewards? Let’s hear it!

For a case study of this strategy, please see “I have seven credit cards. Should I cancel any of them?”

Check your credit score for FREE (for real -- no CC required). Learn how here.

About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. David, you have a well reasoned article here. However, let me politely counter some of the benefits you mention.

    Let me start with saying I have not used a personal nor business credit card in over 8 years.

    Fraud protection. Yes, credit cards can provide this. However, my business credit card provides the same. I did meet with my bank to make sure the protections are in place. Last month when my debt card was declined I found out it was due to a suspicious (but legitimate) charge.

    Leverage in disputes with merchants. I think this is a valid point when the issue is poor service/product and fraud is not involved.

    Travel insurance. Plans backed by your card may be convenient, however they are weak. Like all insurance products you need to customize it for your needs. Ask your travel agent for your own policy that meets your specific needs.

    I travel extensively worldwide. I have used my Debit card in deep Mexico, North Africa and Croatia. Debit cards with a visa/MC backing are accepted virtually everywhere credit cards are. I have only run into a $100 deposit when renting a car here or there.

    Credit Score. The credit scoring system was created by bankers and insurance companies to do one thing. Optimize profits. A credit score for consumers allow us to do what? Borrow more money. I would argue that we should not be using short term debt instruments and instead saving, investing and paying cash for normal expenses.

    Just the opinion from somebody who has lived without credit cards.

  2. I agree with Jacob that debit cards offer the same convenience as credit cards and as Part I of this article pointed out, you’ll likely spend less when you use a debit card instead of a credit card. More on that here:
    http://blog.perkstreet.com/trap-2/

  3. I have had the misfortune of having to replace my debit card twice due to fraud. Whenever a fraudulent charge occurs with my debit card it takes me no less than 5 days to receive a replacement debit card. That’s a week without access to your own funds! With a credit card you still have a access to cash with your debit, plus American Express overnighted my last replacement card after my wallet took a trip into the ocean. Being responsible leaves little risk when utilizing a credit card and can allow you just one more option during an emergency.

  4. Hence you need the debit card. If, when traveling, you are using your credit as a primary spending source and something goes wrong (fraud or theft) you have the debit to access your account.

  5. One good idea to implement if one wants to go ahead with the “cut up or freeze” strategy and you don’t want to get those cards canceled because of not being used is to A) Set up a couple of bills every month to be paid automatically every month from the card and then B) Schedule your credit card to be paid off in full every month automatically from your checking account (which is incidentally what one should be doing anyway with a rewards card for as many of their purchases as possible but this is a good strategy in this situation as well).

  6. David, my highest limit credit card just increased my rate to 22% (that’s nearly double). Would you still recommend this be one of the cards I keep? If I need to use my card and end up carrying a balance, I certainly don’t want to pay 22% APR.

  7. Jim Miller says:

    Dave, if I pay off all (14) of my cards and keep them open won’t that show up on a credit report that my debt to credit ratio is in a very good position? Right now I have abour $150.000 in credit with my cards I will pay them off in the next 3 years with out a problem. if there still open dosen’t this look better then 2 cards at say $16.000?

  8. Credit Card Chaser.
    I first and foremost would suggest auto payments, but not using credit cards. If you are using credit cards and trying to float the loan and pay on time every month setting up autopayments can easily backfire.

    Make sure the auto payment is set up through the credit card company, not from your bank to the credit card. The credit card The due date is never consistent and there is no way to account for that in the autopayment using your bank account. If you tell the credit card company to auto deduct the payment and they fail to do so then you can easily dispute the late payment.

    Question is, do they even offer you that option?

  9. I use my Unite MileagePlus card to pay small monthly bills automatically every month. These include the cell phone, cable, gym, and car insurance. This helps me pay only one bill each month and by the end of the year I’ve got enough miles to upgrade to first class on vacation. Also, United is linked with HiltonHonors which gives me more rewards for the hotel on that same vacation. I get this all for money I would have spend anyways on regular bills. I think Hertz Rental car is teamed up with these two as well but I don’t rent a lot of cars. Just my two cents…

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