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Credit Card Management
06 06 05  22  25
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Credit cards are convenient, and even good when used judiciously. They:
- Keep record of your expenses.
- Facilitate On line and Catalog Trade.
- Offer some fraud protections that debit cards may not offer.
- Provide and end-of-month, easy to read, analyze, and archive statement.
- When used right, help build up the credit score, so that you can buy a house later.
- You can use bank's money for free, for at least 25 days if you pay them in full every month.
- Sometimes they give miles, rewards, or other perks.
- Most of them have no annual fee nowadays, so having them doesn't have to cost a cent.
However, they can also hurt you. Credit cards are way too
convenient. It is extremely easy to charge anything and
everything on them, without having to worry about how to pay them...
for a while. That is, until you find out that you are in a lot
more debt than you can handle. Or when financial hardship arrives
and you suddenly realize you can't keep supporting the lifestyle you
had, nor pay for what you had in the past.
I have a very disciplined approach to Credit Card management, and I want to share it with you.
I have two credit cards, and only two. The rest of the credit
cards are closed, no need for them to be hanging around on my credit
report. My two credit cards have very high credit limits, and I
like to keep them that way so that my credit report shows I use only a
little bit of my credit limit at all times (at most).
For labeling purposes I will call my two cards The Day to Day Card, and The Short Term Card. There is also an important account: The Money Market Account.
It is important to establish that I do not believe in carrying a balance
for any longer than 6 months, EVER! However, sometimes it does
make sense to carry it (see below).
- The Money Market Account - In this account I always keep
$900, religiously. $900 is my maximum spending goal for every
month, for regular and non-regular expenditures, including small
incidentals and accidentals -- every month has at least one accidental,
count on it! It doesn't include house payments, nor car
payments if I had one. If I anticipate I will buy a big ticket
item, I have to bump this amount up (save it up up-front).
- The Day to Day Card - As the name implies is to
charge everything I need to buy over the course of the month.
Groceries, fuel, dining out, clothing, home improvement materials,
etc. Big ticket items like TVs, DVD Players, Snow Throwers, etc.
also go there. This is a Citibank Dividend rewards card. It
gives me a cent for every
$1 spent. The interest rate is 12% but I have never tasted any of
it,
as I PAY IN FULL every month. I pay it from my checking account
(or the excess above $900 from my Money Market Account). I make
sure that the $900 on the Money Market Account are always there -- If I
loose my employment and my income suddenly halts, I will still be able
to pay that last credit card bill before going to the poorhouse (not
that I would need to go to the poorhouse, but that is a different
story).
- The Short Term Card - Sometimes life gives you
lemons. Things go wrong. I mean really wrong.
You should be able to manage with the regular "emergency", be it a new
set of brakes or shocks for the car, a $500 insurance deductible, a
trip to the emergency room, or any of the other common things that will
happen every month. What I mean by things go wrong is above a couple thousand dollars. The car transmission breaks and
you end up with a $2500 bill. Multiple incidentals or accidentals
happen at the same time: car accident deductible, plus plane
ticket to see a sick family member, plus the furnace dies. When
that happens you may be tempted to spend your savings to cover for
them. Me, on the other hand, use a my Short Term Card, a Capital
One credit card with a 7.9% interest that I keep empty just for this
purpose. I charge it when the LARGE accidentals happen, and I
impose myself a goal of paying it up in six months or less. How
do I pay it? I have to spend less for the next few months.
You may ask why I don't use my emergency fund (3 to 6 months of
savings) for those situations, and I pay 7.9% of interest (versus the
3% that the money market may pay). There is a reason: It is extremely hard to save.
It is easier to pay a bill that someone sends you every month
(specially if they tell you that they will charge interest) than to
save in a boring savings or money market account that pays a miserable
interest. It makes me pay in 6 months, rather than take years to
build up the savings fund again.
What about store cards?
Avoid them as much as you can, usually they charge about 18%.
However, I do make one exception. Sometimes I have been saving
for a big ticket item for a while, and when I get to the store to buy
the item they offer me no payments and no interest for a year. I
put the money on my money market account, and I take the card if the
savings on interest would be good. 3% of $5000 is $150. At
that point it makes some sense. Just close them as soon as the
deal finishes, and be sure to pay them off before the offer ends --
otherwise you will get 18% of interest.
Other bloggers take on credit?
Is it the right way? I know it works for me. You may want to think about it.
Share with us your way of handling credit cards.
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