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Before I start, I need to preface with the following: none of the below will work if you do not pay off your credit cards in full each month. A credit card is an interest-free loan for up to 30 days each month and after those 30 days, the interest rate skyrockets. You have to practice self-restraint and charge only what you can fully pay off at the end each billing period.
With that out of the way, let’s get to it. Credit cards are incredible financial tools that, when utilized properly, can help you gain benefits ranging from fraud protection to primary car rental insurance to cash back on your weekly grocery bill to affordable travel in international business class. In addition, my aforementioned point about credit cards being a loan reflects arguably the most important part of credit cards: protection from fraud. Whenever you charge anything to a credit card, you are spending another bank’s money. If your card number gets stolen and the card gets used fraudulently, that’s the bank’s money being used, not your money. It’s much easier to dispute charges on a credit card and not pay them until a resolution is reached, rather than have to go through the ordeal of having your bank give you back your own money because your debit card number was stolen and used elsewhere. I never carry my debit card on me; it sits tucked away in my financial drawer and I only pull it out if I have to make a deposit or withdraw cash. Otherwise, it’s credit cards only.
Further, contrary to popular belief, it is not bad to have numerous credit cards open. A major component of your credit score (about 30-40%) is your debt to credit ratio; the lower the better. As long as you pay off your cards in full each month, opening more credit cards will dilute this ratio. I currently have ten credit cards and a debt to credit ratio that hovers around 3%. A debt to credit ratio of under 20% is great, while a ratio under 10% is ideal. Further, while opening a credit card will temporarily lower your credit score by 10-20 points, that score will rise back up within a few months because the pull ding will be offset by the decrease in your debt to credit ratio. Unless you’re planning on buying a house within the next year or two, you can safely open 2-3 cards a year. I’ve opened two cards this year and my score sits firmly at 807.
Finally, the fun part: accumulating and using rewards. I’ll begin by splitting credit cards up into two main rewards categories: cash back and travel rewards. Cash back cards are the best way for beginners to get in the game, develop good card habits and benefit from some perks, although the best ones are definitely reserved for travel. My two favorite cash back cards are the American Express Blue Cash Preferred card and the Chase Freedom card. I use the American Express for all my grocery shopping. The card comes in two variants: the free version (called “Blue Cash Everyday”), which includes 3% back on groceries, 2% back on gas and department stores and 1% back on everything else and the Preferred card, which has a $95 annual fee, but its rewards category rates are doubled. Run some numbers and see which suits you best – I started with the Everyday, but now that I live with my girlfriend and we have a higher grocery budget, I use the Preferred. The break-even point is about $264/month. If you spend less, get the Everyday card. If you spend more, get the Preferred. As an example, if you spend $250 on groceries a month and get the Everyday Blue Cash card, you’ll earn $90 back per year just from buying groceries. If you spend $350 per month and get the Blue Cash Preferred, you’ll make $157 a year in cash back. That’s free money.
The other cash back card that I really like is the Chase Freedom due to its rotating 5% back categories. Every quarter, there will be certain categories that will give you 5% back on all your spending up to $1,500. So for example, this card had gas (among others) in Q3 and this quarter one of the categories is wholesale clubs. You also get 1% cash back on all other purchases so it’s a pretty solid everyday spend card. If you can’t make use of the various 5% cash back categories, I suggest looking into the Chase Freedom Unlimited. With this card, you get 1.5% back on all purchases without any quirks.
My favorite travel card, by far, is the Chase Sapphire Reserve. Yes it has a $450 annual fee, but that fee cancels itself out extremely easily, especially your first year where you’re eligible for the 50,000 Ultimate Reward point bonus. This card comes with a $300 travel credit, which is good for literally anything: Uber, plane tickets, bridge toll, bus pass, etc. so the net cost is $150. This is further offset by the Global Entry/TSA credit and the Priority Pass that comes with the card. This pass, which is active for as long as you have the card, will let you and up to three guests enter numerous airport lounges worldwide for free. Most US airports have at least one, if not more, and most international airports have these as well. These lounges have showers, food, anything you may need before, during or after long travel. The card also has other perks like price protection and primary car rental insurance, so that if you ever rent a car and pay for the rental with this card, you’re fully covered in case you get in an accident.
The card also lets you redeem Ultimate Rewards for travel at a 1:1.5 ratio. So that $300 flight to NYC suddenly costs 20,000 points. Since the card earns 3 points per dollar spent on things like restaurants and travel, you’re basically earning the equivalent of 4.5 cents per dollar spent when you redeem on things like flights or hotels. The best redemption rates, however, are when you transfer points to airlines and book awards that way. It’s how I was recently able to use 126,000 points to book a business-class flight from Europe next summer for my girlfriend and me. If I were to buy these tickets outright, they’d easily be $3,500 each, if not more, so the redemption value is ridiculous. However, because this post is already long enough, I’ll go into detail for how those award bookings work in another post.
Feel free to ask any questions you may have in the comments and I’ll try to address them. I’m also open to suggestions for what to write about next time besides the travel award bookings..
Respond
Pro tip that our boy Bill didn’t mention: tell your wife that your credit limit is half of what it is. Unless you’re into her spending more than your monthly income at Target every month
Good write up. Especially the tone of the column that credit cards aren’t evil. I think it would be good to mention that if you have multiple cards that aren’t in regular rotation, its good to throw a recurring monthly charge on the cards you don’t regularly use. Like a Netflix subscription or some other subscription like that and set it to autodraft. This keeps the card in active status and you wont run the risk of it being cancelled due to inactivity. Plus, its more check marks in the “paid on time” column, which never hurts.
Couldn’t agree more, great point about the recurring charges on cards that are no longer in use. One thing that I’ve found is that if you have multiple cards with the same bank, the bank is less likely to cancel your inactive card. But that’s more of an anecdote than a rule of thumb.
I also appreciate the “credit cards aren’t evil” viewpoint. It takes the scary away. As someone who racked up about $3k in credit card debt the first time she ever had one and defaulted on most of it, I’m absolutely petrified to get one now, but I don’t want to be scared, I want to be responsible the next time.
10 credit cards seem a little excessive. The Chase Freedom Unlimited and Sapphire Preferred/Reserve are definitely a fire combo though.
I don’t use them. I did at one point, but I’ve since moved on to other cards (I usually keep 2-3 on rotation depending on what I’m buying and sometimes one more if I’m trying to meet a minimum spend offer). But I keep them open because of the credit lines they have on them in order to keep the debt to credit ratio low.
Quick question: while I see your point to the debt:credit ratio, doesn’t having a higher amount of credit and not always using all and/or some of it also hurt your score in the long run?
Also, are you a swipe, tap, or chip guy when you’re checking out at the grocery store?
Not at all, hurting your score in the long run like that is an urban legend. Having cards, but not using them doesn’t impact your score. Actually, especially if they’re older, closing some will hurt your score because the third largest credit score component is length of credit history. If I were to close my card that I opened in 2011 but haven’t used for years, my credit score would take a shit.
Most stores around me are chipped, but I have no preference.
How are you not getting these cards closed? Most companies will send you warnings they’ll close the card if it’s been unused after several years.
A mix of random charges every now and then, kind of like Government Slacker pointed out except not recurring monthly, and because I have multiple cards with the same banks. I don’t know this for a fact, but I think that if you have multiple cards with the same bank and you use one of them often enough, they won’t close the others because you can always transfer your available credit between the cards.
Great article for someone who is deep in the CC game (currently at ~13 cards). The name of the game is the sign up bonuses. Getting 1-5% back is great and all but unless you spend some ridiculous amount of money the focus should be more on the upfront bonuses. Just make sure to keep track of annual fees and ‘downgrade’ cards (such as the CSR) to a free card (such as Chase Freedom) before the second annual fee hits for cards you are not using regularly and only use for the bonus. In the past 2 years I’ve accumulated ~1M points across a number of different programs which allows me to travel for free whenever I want. It’s also a game of diminishing returns seeing that there are at any given time like half a dozen cards with mega value (such as new Amex Gold if you have a referral, ~$920 first year in value for a $250 annual fee). The first point in this article should trump any advice anyone tells you though, if you carry a balance I promise all these sign up bonuses are for nothing and will only be detrimental. Highly recommend checking out the /churning subreddit to anyone who wants to learn more its been a great resource for myself.
r/churning
What made you choose Sapphire reserve ultimate vs Amex plat?
(Traveling consultant take) the Amex platinum is good to me only if you fly a lot. The 5x points on flights balls out, the Centurion lounges are excellent (especially since domestically Priority Pass sucks) and the Uber credit is useful. With that being said, you don’t have to travel significantly to make the Sapphire Reserve worth it, and the $300 credit can be applied towards Uber’s. If my company didn’t recently switch to Amex travel, I’d never use the Platinum. Also, the insurance coverage on the sapphire far exceeds the platinum. Last perk of the platinum is SPG and Hilton status, so again if you travel and hit hotels a lot you’re good to go.
Pretty much this. I also rarely pay for flights with cash so those 5x points were basically useless to me. I’m also heavily entrenched in the Ultimate Rewards ecosystem with my Sapphire, Freedom and Ink Business so it’s easy to earn bonuses on one card and move them to the Sapphire for redemption.
We play a tandem game with the Amex Platinum and CSR. The multiples worked out for us best this way and the annual fees still offset for the most part. Haven’t paid on any travel expenses in over two years. I will say, the CSR metal is TRASH compared to the Amex Platinum.
While I agree the platinum metal is way better, if that’s a deciding factor you might want to rethink your priorities..
Just making a joke. We had the Amex first and were shocked when we got the CSR.
Wasn’t implying you personally, just people in general. Wouldn’t be surprised if that’s a decision point for people lol
The power of things like Chase Ultimate Reward and Amex Membership Rewards points is in transferring to partners. I’ve gotten business class flights to Europe and hotel stays in suites without spending any cash. Keep that in mind before cashing in for 1.5% via the travel portal or redeeming for cash back.
May be late to the game & also late to the credit card game. I used to always believe CASH is king… but I will say now, WRONG. I am still new and can’t agree more with the cash back instead of points for getting into the credit card game (have a handful of 0 perks reward cards that use the “netflix & chill”. My first year with a cash back card did the whole charge & pay off every Friday. This year alone (middle of January until yesterday) I’ve racked up over $500 in cash back it also helps there 0% interest for 15 months BUT still stay in the habit of paying it off every Friday.
For those of you with Samsung Pay or heavy Apple Pay users, the US Bank Altitude Reserve is the best card you can get. 3% back on everything and points worth 1.5 cents each on all travel.
807? Nice. 800 club (803) stand up and salute this man.
825. Just sayin
I think I peaked at 809 one time. Anything over 800 IS just more icing on your cake, but you can never have too much icing. Also – FICO from transunion is ~25pts lower than FICO from experian. Such a wild world those companies operate in
I saw Bill Nye speak last year. He just blabbed on about solar and wind energy but didn’t even mention credit cards.
Take advantage of the Chase Freedom 5% categories; transfer points to Sapphire reserve; get 7.5% back when you buy travel; profit
Best credit card for a college student about to graduate? Or no card?
Appreciate this article. A lot of it still feels pretty overwhelming. I have capital one venture as my only card. I like it because I live out of state from my family so I travel quite a bit and it adds up for my flights when I get 2 points, it has a low fee and I pay it off all on time and I sit in the high 700s. I see what you’re saying but I think I’d struggle to manage multiple accounts. I’m pretty cautious with my money but I don’t feel like I actually understand much about how finance works in the big scheme of things.
I’m all here for the Chase Sapphire Reserve and love the travel points you get with it, but don’t get your hopes up about airport lounges. The priority pass, which you get with the CSR, is the first group of members to get denied entry if the lounge is even close to full. I’ve tried using mine four times and have only been successful once :/
I got Chase Freedom when I was a junior in college. Chase Freedom Unlimited wasn’t an option back then, so I didn’t have the choice, but I think either is a good option as long as you trust yourself to be responsible with it.
Getting a credit card then was one of the best decisions I made because it was the only credit I had when I graduated until I started paying back my student loans.
You definitely want a credit card as a way to build credit in case you want to purchase a car/house/etc. in the near future. Also, a lot of times when you look to rent an apartment they need to see your credit score so it is good to start building that up before you even graduate. Like Bill said, just make sure you’re paying in full every month.
Personally, I’m a fan of the cash-back rewards cards. I have the CapitalOne Savor card and it gives you 4% cash-back on dining and entertainment, 2% on groceries, and 1% on everything else. If you’re like me, this was ideal right out of school as most of my expenses are on eating and going out, so the rewards for this are huge.
I’d say Bill’s suggestion of getting a simple cash back rewards is a good place to start. My first credit card was Bank of America – they sent me an offer for 3% on gas, 2% on groceries and 1% back on everything. Still the main card I use and I love it. I don’t travel very frequently
I’d go with a Chase product for someone getting in the game, but if you feel you’re a bit irresponsible with a card, a charge card (Amex Green or Plum no annual fee year one) is probably a better bet to start stacking points because knowing it’s due IN FULL with no revolving credit really hampers the appeal of ballin’ out.
Depends what your use would be. If you spend a good amount on groceries each month, would recommend the aforementioned American Express card.
Definitely get a card. The younger you establish credit the better. The American Express one he mentioned is great, Chase Freedom is also good. I started with the US Bank Cash + when I was in high school and worked great until I started spending more on things besides the essentials.
Yes to getting a card as long as you pay it off in full. Can’t overstate that. If you take on more debt like going to graduate school or buy a house you will have credit built up and can get a lower interest rate. If you don’t pay it off in full every month though you are shooting yourself in the foot
I got Chase Freedom when I was a junior in college. Chase Freedom Unlimited wasn’t an option back then, so I didn’t have the choice, but I think either is a good option as long as you trust yourself to be responsible with it.
Getting a credit card then was one of the best decisions I made because it was the only credit I had when I graduated until I started paying back my student loans.
I’d go with Discover personally they have two cards specifically for college kids. The chrome card gives 2% on gas & restaurants and 1% on everything else or just the discover it card which is very similar to the Chase Freedom. Idk if they have the same promotion as other cards but I got cash-back match; so your first year is 4% with the chrome and 2-10% for the IT card.
That’s how we do it in the big leagues. This year’s Thanksgiving shopping trip to Costco is going to help pay for European travel next summer.
Venture card now has airline transfer partners. Just was announced yesterday.
I agree. I capital one too, and have been toying with the idea of getting another card in my rotation. But this article broke me, I don’t know what I want to do now.