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.
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.
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?”