No, it doesn’t hurt your credit score!
(Read the “myths” section to find out more.)
Credit cards have many purposes. They can be used for household expenses when cash is not immediately available (a self-administered paycheck advance). They help businesses advance funds for supplies or materials. They allow employees to make purchases on behalf of their employer without carrying large amounts of cash. They are the preferred payment method for phone and online merchandise orders. They can also get people in over their heads in debt, ruin personal credit, and saddle cardholders with monthly interest payments. Credit cards are a financial tool, and like any tool, they can be used properly or improperly, for the benefit or the detriment of their users.
The internet is full of good and wise advice about credit card use, building credit, and avoiding the pitfalls of credit cards. While I will touch on each of these subjects, it is not the main purpose of this site. Here we will focus on the most exciting and beneficial aspect of credit cards: sign-up bonuses, points programs, and other incentives.
Before delving into maximizing the benefits of credit cards, some warnings must be given:
- Don’t trust me – Neither the author nor the contributing writers of this site are financial advisers or credit counselors. The internet is full of more complete and thorough treatments of credit management than ValueTactics even attempts to provide. While we give the facts as accurately as our knowledge and experience can provide, do your homework before taking any actions which could affect your credit score or personal finances.
- Your mileage may vary – This is an important phrase to learn in the world of credit cards. There are so many variables involved with applying for cards, earning points, redeeming points, etc. that it’s unreasonable to expect the exact same results as others have achieved. In some cases, you’ll end up worse off, and in some, better. This has a lot to do with timing, individual customer service reps, etc.
1. Evaluate your creditworthiness.
1.b. If needed, build your credit score
2. Use credit cards to sequester debt and reduce interest payments (if applicable)
3. Use credit cards to earn huge sign-up bonuses
4. Manage card spending and earn additional rewards
5. Evaluate the value of paying annual fees to keep certain cards
Credit cards can be addicting. No, I’m not talking about spending addictions. I’m talking about card sign-up bonuses, retention bonuses, category bonuses, and other valuable benefits that card issuers dole out to cardholders who are savvy enough to take advantage of the right offers at the right times. Of all the tactics discussed on this site credit card offers are by far the most valuable. Since starting all this in the summer of 2012, my wife and I have been approved for over 20 credit cards. We’ve saved over $1,200 in interest payments, received over $1,875 in cash rewards or reimbursements, and redeemed $25,000+ in free travel! And all this while still carrying some old credit card debt. Many others have achieved the same results. With numbers like these, don’t you think even the biggest skeptic would want to take a closer look? Then read on…
Step 1 – Self-assessment
Before diving head first into the credit card game, you need to answer some basic questions about yourself:
- Do I currently carry credit card debt month to month?
- Regardless of the answer to the first question: do I make the minimum payments
on time each month?
- What is my credit score? If it’s bad, what’s dragging it down?
- Am I able to be diligent and organized?
If you aren’t proud of your answer to any of these questions, don’t worry. None of these issues is necessarily a deal breaker. If you’re not currently ready or able to get into this, there are tools and methods to make you ready. Let’s address each of the questions and explain how your answers affect your readiness to get into the credit card game:
1. Current credit card debt.
Many similar websites advise readers with current credit card debt to hold off getting any new cards. While I understand why they give this advice, I don’t fully agree. It largely depends on why you have the debt (see this post). In fact, opening new credit card accounts while in debt is what helped my wife and I to reduce that debt. So although it’s not a deal-breaker, it is necessary for you to analyze your current debt and your current budget/expenses, especially if your current debt is increasing month to month.
2. On time payment history.
I just told you that none of these issues was a deal breaker. Well, I kind of lied on this one…sort of. If you have a history of late payments, it’s going to affect your credit score (see 3.). Additionally, if you’re in the habit of making late payments, you must eliminate this habit before continuing with credit cards. On the other hand, if you are good about on time payments, keep it up and you’re good to go!
3. Credit score
If you don’t know your credit score, you should. Your credit scores with the three major reporting bureaus (Equifax, Experian, and TransUnion) are a numeric value from 300-850. This is called your FICO score (FICO is the scoring system used by the credit bureaus). Your score give lenders a general idea of how creditworthy you are. Specific information contained on your credit report gives lenders even more information on how high or low a credit risk you are. Your score is based on the following factors:
Getting your score is extremely easy and free. Here’s how:
– You are entitled by federal law to a free annual report from each of the three major credit bureaus. These reports will give you details about what’s affecting your score, but will not give you the score itself. (You can see your score, but for a fee.) To see these reports, a website has been set up by the three bureaus, www.annualcreditreport.com.
– I use two websites, creditkarma.com and creditsesame.com, to get a ballpark estimate of my credit score. You can check your “proxy score” on these two websites as often as you like, for free. They are better at detecting changes in your score than giving accurate score numbers. I highly recommend you sign up for both sites and check them regularly.
– Sometimes when you get your approval letter for a credit card (or a loan), it will list the score that was used to approve your account. This will be an actual score and will indicate from which credit bureau it was taken. I use these to “calibrate” the estimates I get from the two websites mentioned above.
Knowing what’s on your credit report and having a general idea what your score is will help you determine which cards are worth applying for, and which cards can wait until you’ve improved your score.
4. Diligence and organization.
Being naturally organized definitely helps. It reduces the chances of you getting in over your head with debt, missing bonus requirements, and hurting your credit score with late payments. It also helps when it comes time to maximize the value of your card benefits. That being said, I am a living testament that someone who is naturally very disorganized can learn to keep track of things when doing so creates enough value. There are only a few things that absolutely must be kept track of, and I provide some helps on this site to get you started.
So, you’ve assessed your current finances, decided to make on time payments a priority, checked your credit score, and have a willingness to stay diligent and organized. Now what? It’s time to shop for a card and learn about the joy of “app parties!”
Steps 2 & 3 – Get Some Cards
This is where the fun begins! Some people get thrills from strange things, and if you’re reading this page, you’ll soon discover that applying for credit cards can be one of them. Before shopping for cards, you first have to determine what your goals are. Are you looking to travel for free, reduce interest payments, earn cash rewards? If you want to travel, do you live near a Delta hub? American airlines? United? (More on this on the Points and Miles page)
Benefits to look for in a card
- Sign-up bonus: Most premium cards come with an attractive sign-up bonus. I usually won’t bother with a card for less than 30,000 or 40,000 points/miles. Even if I put every purchase I could on a single card, it would probably take me 2-3 years of regular spending and points accrual to equal the amount of points earned in one sign-up bonus. The bonus usually requires that you meet a minimum spend in a certain time period (commonly 3 months). The clock starts ticking on the day you are approved. Don’t play chicken with the deadline date. Purchases take a few days to post to your account, so make sure you hit the minimum spend with time to spare.
- No interest promotion: If one of your goals is to reduce your current interest payments, you can open a card with a no interest promotional period (commonly 12 months). You can then transfer your balance to the new card or slowly move your debt to the new card by putting all spending on it, while paying off your old high interest card. Keep in mind if you transfer the balance there is usually a fee involved. You’ll have to do the math to figure out how much you would save on interest payments to determine whether or not the balance transfer fee is worth it.
- Category bonuses and other benefits: Another attractive benefit on some cards is the category bonus. These categories can be anything from specific merchants, fuel purchases, travel, dining, or anything else that can be tracked on a per-purchase basis by the card issuer. On top of the typical 1 point or mile you earn per dollar spent, purchases in these categories earn you an extra 1, 2, sometimes even 4 points/miles. These bonuses can make regular spending quite valuable. Don’t forget to look at other benefits like free checked bags at a certain airline. If you already have travel plans in mind, that often overlooked benefit could be worth several hundred dollars in value!
Once you have some points and/or miles goals in mind, or some other type of goal, it’s time to shop for a card. There are plenty of resources out there to help you choose a card. Websites like ValueTactics are good about staying updated with the best offers available. Check out the credit cards posts for the best current offers on many cards. I won’t give a complete list of resources here; a quick google or bing search can do more than I could ever hope to do in that regard.
When I have a card in mind, I typically look it up on creditkarma.com. They have a great feature that can give you an idea of what credit score might get you approved. Of course, your mileage may vary. Use it as a guide; not a hard and fast rule.
Depending on your level of commitment and your desire for points, you could apply for more than one card. Some people do three at once to maximize the collective “hit” to their credit score. When the highlight of your evening is clicking the “apply now” button on three different browser tabs, and experience the joy of seeing that “You’re approved!” message pop up, it’s called and app party. Don’t knock it until you try it! Keep in mind: most card bonuses require you to put a certain amount of minimum spending on the card in a finite time period, so don’t over-extend your spending ability by apping too many cards at once.
Your main reason for getting the card was probably for the sign-on bonus, so missing it due to poor planning would be a travesty!
A word on referral links:
Most card/points/travel bloggers pay for their sites with income earned on advertisements and referrals to credit card offers. If you have gained some valuable knowledge through these sites, please say ‘thank you’ to the author by clicking through his/her links to apply for cards. Since ValueTactics is fairly new, we don’t have direct links to many cards’ application pages. The ones we do get credit for are listed in the left sidebar. Most bloggers are ethical: if there is a better offer than what they can refer with their links, they should (and usually do) give that disclaimer and point you toward the better offer.
So do your homework before applying for a card. Make sure you’re getting the best deal available for that particular card, and click through my or someone else’s referral link to get to the application page. Help us help you!
When you apply online (using your friendly local blogger’s referral links) you will get one of three responses: denial (rare with online applications), pending, or instantly approved.
“Pending” can mean that you’ve will eventually be denied, in which case you probably won’t find out until you get a letter in the mail. It can also mean you will be approved once a human looks at your application and gives it the final approval. And frequently, “pending” means that a real human will take a look at your application and make a final decision.
When you get a “pending” result, your odds of getting the card are vastly improved if you are proactive, meaning you call the card issuer’s reconsideration line. A list of these phone numbers is maintained in this myFICO forum post. With these numbers you will skip the lowest level customer service reps and get straight to the people who can actually make decisions about your application. With these people you can make your case for why you deserve the card. Some tips on calling the recon line:
- Call the day after you apply. If you would have been denied without calling, it’s best to get a hold of them before that happens.
- Don’t sound nervous. My tactic for accomplishing this is to be prepared with answers to possible questions they might ask, and to only say what I really mean – no b.s.
- Know the card benefits and offer terms for the card you’re calling about.
- Open with an explanation of why you are calling: “Hello, I applied online for xyz card yesterday, and I got a ‘approval pending’ message. I’m calling to ask about the status of that application, and to offer any additional information you might need to make your decision.”
- Issuers typically have a maximum total credit they are willing to extend to a customer. If you already have a card or two with that particular issuer, offer to move some of your credit limit from another card to the new card.
- Don’t burn bridges. If you don’t get your way, be courteous and end the call in a friendly way.
Step 4 – Manage Card Spending
Flash forward several months… You planned your credit card tactics properly, and you have just been credited your huge sign-up bonuses after meeting the minimum spends on your cards. Now what? Should you continue to put all the purchases and bills you can onto the card? Which card should you use for regular spending? If you’re asking yourself these kinds of questions, you’re on the right track.
Here are some branches in your decision tree on which card to use for what:
- Am I currently working on a bonus spend for this card?
- Does this card offer a category bonus for what I am purchasing?
- What are the points I earn on this card worth to me, compared to those earned on other cards?
- Will this purchase be reimbursable with points if that’s how I plan on eventually using them?
- Can I pay off all my balances this month? If not, which card will be 0% interest until I can pay off my balances?
My wife got tired of always calling to ask me which card to use before making a purchase, so she asked me to write it all down on a chart. So I made a spreadsheet listing which card she should use for what kind of purchases. I printed it out and she keeps it in her purse with her cards. Whether you use a similar method or not, it’s helpful to figure it all out beforehand, so you don’t end up holding up the line at the cash register as you fumble through your stack of credit cards, trying to remember which one gives you bonus points for xyz type of spend.
Step 5 – Card Wallet Spring Cleaning
Many premium cards waive the annual fee for the first year. I have a multi-page spreadsheet where I track all my card info. One of the primary things I track is when the card’s next annual fee will be due. When the fee comes due, I have to decide whether to keep the card, cancel it, or downgrade it to a non-fee version. This decision isn’t as complicated as it sounds.
Estimate how much value you are likely to get out of the card in the coming year. If the estimated value is more than the annual fee, then it’s probably worth it to keep the card and pay the fee. If the estimated value derived from the card and its benefits is less than the annual fee, you should probably look at canceling or downgrading the card.
Remember, earning points is not the only source of value from a card. For example, let’s say you already have flights planned for which you will be checking luggage and it’s going to be $60 per way on a round trip flight. If you have a co-branded airline card with a $95 annual fee which is due, but the card gives you one checked bag per trip, you’ll save $25 by paying the fee to keep the card, on top of any other benefits the card might provide you in the coming year.
If you determine that the annual fee will likely be more than the value to could get from keeping the card, it’s time to cancel or downgrade. Some cards have a no-fee version, usually with fewer benefits. The advantage to canceling is that you may be eligible to get the card again someday and get the bonus again. Fewer and fewer issuers allow this “churning,” as time goes on, however. The main advantage to asking for a conversion to a no-fee version of the card is that you retain the account age history (helps your score) and you retain the credit extended by the card, which helps your credit to debt ratio (also good for your score).
Whether you have it in mind to cancel or downgrade, go into that phone call ready to hear about retention offers they might present you with. Some card issuers have a reputation for offering valuable bonuses for keeping the card and paying the fee. Some will even waive the fee if you call to cancel. Have some numbers ready in your head so when they make the offer you can answer without feeling pressured. If you can’t decide right away, you can always call back later with your decision.
MYTHS ABOUT CREDIT CARDS
Having been in this game for a few years now, I’ve heard it all…and heard it all again. There are some persistent myths about credit cards out there that keep getting perpetuated. Let’s put them to rest:
Myth 1: “Doesn’t opening all those accounts wreck your credit score?” With over half the people I talk to about credit cards, this is the first thing out of their mouths. NO IT DOESN’T! It is true that each time your credit is pulled, your score takes a small hit (usually 3 points). This hit fades in a few months and will be more than made up for by increased credit to debt ratio and average length of account life. As of this writing my wife and I each have 10 open credit card accounts and both our credit scores are at their all time highs.
Myth 2: “Paying off all but $1 on your monthly bill is better than paying it down to zero.” No, no, no. So you think the fact that you pay the issuer 1.1 cents interest every month is going to make you a paragon of creditworthiness in their eyes? Sure, they like it when you pay interest, but do you know what they like even better? A customer who is a low risk of default, meaning you pay the minimum payment on time every month. If you can do that, whether or not you pay interest on a measly amount each month is of little importance. In fact, it’s almost the opposite. Card issuers get nervous when you have a high percentage of debt to credit, so paying down your cards as much as possible (preferably to zero) each month is the best idea.
Myth 3: “All the good cards with big sign-up bonuses (Can I say ‘boni’ instead? I like ‘boni’) have high annual fees.” No. Most of the cards promoted on this site will waive the annual fee for the first year. After the first year is up, you can decide whether it’s worth it to keep the card. There are also plenty of cards with decent boni that have no annual fee.
Myth 4: “The credit card I have right now is awesome! It gives me x% back on x type of purchase!” No offense, but Pssshhht! By the time you’re done with your first round of new card applications, you’ll scoff at any card that doesn’t give you at least $400 worth of sign-up bonus points, PLUS the x% back on x purchases that “other” card gave you.
Myths About Using Credit Cards as a Value Tactic
In addition to the popular myths about credit cards in the general public, there are several commonly repeated pieces of advice in the credit card/travel blogging world that I take issue with. That is not to say that the advice is bad per se, but if I had heeded much of it, I probably would have stayed away from the credit card game altogether. The following “tips” need to be qualified, and not used as blanket advice for everyone in all cases:
Myth 1: “Thou shalt not open new credit cards if thou currently hast debt.” Well, that depends. It depends on why you have debt and what your overall financial situation it. In my case, I had accrued debt while going to school full time and needed to use credit cards to pay for necessities. It was a temporary situation, so the debt accrual was finite. There are many reasons why it would still be o.k. (and in some cases extremely valuable) to open new cards when you’re currently in debt. Read this post for more on this topic.
Myth 2: “Thou shalt not waste thine time on cards with small bonuses.” In the section above I scoffed at cards with less than a $400 value bonus. But if your credit score isn’t high enough to apply for these “premium” cards, you’re going to need to up that credit score first. And why not maximize the value you can get with the cards you can get along the way. When my wife and I started out, we both had credit scores that were less than optimal, so we both got cards with $100 bonuses after the first $500 spend. That’s not stellar, but it was still $200 more than we would have had otherwise. Free money is always worth it.
Myth 3: “Thou shalt not pay an annual fee; not now, not ever.” I have taken some flak from my credit card friends for signing up for cards that don’t waive the annual fee and for paying the fee on a first-year-free card when the fee comes due. While some make a it a goal to get large bonuses and incur absolutely no expenses, it’s not the only valid way to do this. In my opinion paying the annual fee (whether up-front or after the first year) is always a matter of cost/benefit. If you can get 40,000 miles for paying an up front $89 fee, and you already have plans to do some traveling with that airline, it’s worth it in my opinion.