Hello everyone! As long-time readers will know I’m a big advocate that we should avoid credit card debt, but as long as you use them carefully a credit card can be a real force for good!
Specifically what that is depends on your situation – you’d apply very different tools to different financial positions. So that’s the focus of today’s post.
OK, what good can I do with a credit card?
Depending on your financial position the advantages of “good credit card” use include.
- Rebuilding you credit score
- Using it as a management tool on your debt.
- Getting rewards for spending you would do anyhow
- Reducing monthly payments.
All of these are excellent money mantras. What’s we’re going to do today is look at a few profiles of various financial positions:
- Mr. or Mrs. Minimum Payer
- Mr or Mrs. Getting By
- Mr or Mrs. Paid off in full.
We’ll these use these profiles to match you to a card type.
In a future post, I’ll explore some of the best cards available on the market of each type.
The Golden Rule of Credit Cards
Before we begin, it’s always important to hit on one of the mantras of this site:
It’s always best to pay off your credit card in full if you can.
If we can’t get there immediately, this is designed to help us get there. And if we’re already there, it’s intended as a guide to maximise the benefit we can get from it.
Remember to check your eligibility!
You’ll want to check your eligibility for any credit card before applying, as they’re not created equal. Different credit cards target different financial profiles and unfortunately if you apply for a credit card and get rejected, it can hurt your credit score.
There’s an easy way around this – you can do a simple check on if you’re likely to be accepted for most cards for free. You can usually find an eligibility checking offered on the website for whoever issues the credit card you’re looking at getting (and it’s best to use the one directly from the credit card issuer – after all they’ll be making the decision so are best placed to judge!)
Profile 1: Mr./Mrs. Minimum Payer
- Pays only the minimum payment each month on their credit card, never paying off the additional balance.
- Has a relatively small credit limit.
- Faces a growing card statement each month causing that minimum to grow.
This is not a healthy relationship with a credit card, although plenty of people are in just this situation. I’d recommend having a read through my article on why you shouldn’t pay the minimum on your credit card for a more in depth understanding of why.
With this profile, we’re in repair mode – there needs to be a shift in behaviour to try and clear the debt down as much as possible, and there are two tools we can use to do this involving credit cards.
Option 1: A balance transfer credit card
The most ideal tool is a free balance transfer credit card. These cards allow you to transfer your existing debts onto them but pay very little or even no interest (initially!) giving you some breathing space to clear the debt.
They need to be used with some care, as after the introductory period the rate can tend to skyrocket – so you have to be determined that you can pay it off in that period and have a clear get out of debt plan.
And if you’re thinking “well, can’t I just transfer my balance to another card once the period ends” – it’s not advisable to do this long term, and you may find your credit rating limits your ability to do this.
If your credit rating is particularly bad you may find that balance transfer cards won’t accept you, because you are too much of a risk.
Remember, anything that you can’t put on a balance transfer credit card you want to minimise the interest on – so read the advice in the “Mr./Mrs. Getting by” section below on interest minimisation.
Check back – we’ll run through the best balance transfer cards in a future article.
Option 2: A credit score repair card
Option 1 above is generally preferable as that interest free balance can do more immediate good. Using a credit score repair card is generally a later stage tool – it’s after you fixed the immediate problem of debt and are more looking to rebuild you financial profile.
It does exactly what it says on the tin. These cards are generally specialist providers that work with people who’ve had poor credit to help build up their score again.
Again these cards need to be managed sensibly – because they’re being aimed at people with poor credit, the interest rates are high – you want to be using these credit cards to demonstrate that you can utilise credit effectively (i.e you can have a credit limit and demonstrate your ability to manage it well, thus are not a risk of defaulting on any payments).
Check back – we’ll run through the best credit score repair cards in a future article.
Option 3: Don’t use a credit card at all.
I’ve demonstrated how the above can be helpful to rebuilding your financial position.
However, if you cannot get your debt under control or find yourself unable to trust yourself with credit card management I advise you to you simply go cold turkey, hide your credit cards and pay for everything in cash.
The easiest money to manage is the money that you literally can see, touch and consciously spend every time rather than the sometimes theoretically seeming money that gets spent on cards.
And have a plan:
If you’re in this category, it is important to have a plan to reduce your debts. I recommend some follow up reading of my post on how to manage yourself out of credit card debt here.
Profile 2: Mr. and Mrs. Getting By
- Is able to pay off a reasonable chunk of their credit card bill each month, but clearing out the full thing is a bit too much.
- As a result their monthly payment is largely consistent, with some minor variance.
- Has a medium size credit limit.
- Is living on enough to be comfortable but does not lead an extravagant lifestyle.
Option: A bog-standard credit card with a low an APR as possible (after checking for the balance transfer card above).
There’s really only one option for these people which I expect to be a significant amount of the population – you simply want a card that reduces the amount of interest payable by as much as possible. That’ll help chip away at that balance over time.
Honestly, this one is easy! You just want as low an APR as possible to minimise what you lose through interest. Obviously the balance transfer advice free interest rate above is the obvious first port of call, but otherwise simply look for a card with an low an APR as possible that can give you the credit limit you need.
No, the real danger to this group that can leave them trapped is temptation….the rewards credit cards I’ve suggesting to the group below with their promises of air miles and hotel stays and all sorts of fantastic things can sound so good.
However, stay the course – I promise you that you will find the benefit of clearing your debts greater than the value of the rewards as those reward cards are considerably higher in APR – even if they sound a bit more fun.
Plus you won’t be as tempted to spend more than you should because those extra air miles are just in reach – a danger of the reward cards .
Check back – we’ll run through the best low-APR cards in a future article.
Profile 3: Mr. and Mrs. Paid off in Full
- Is an an advantageous financial position where they are paying off their credit card bill in full every month.
- They have a large credit limit
- They likely lead a very comfortable lifestyle.
Well, congratulations – this is not an easy position to get to! Credit card companies have rather mixed feelings towards you – they don’t get the big earnings from interest payments, but they usually rack up a bit from you in card fees!
There’s a couple of options you guys can consider, and which is right for you depends on what you might use.
Option 1: The Cashback Credit Card.
For most people, a cashback credit card will be the best option. These are great – you’re essentially getting a small proportion of spending that you’re doing anyhow refunded to you.
It’s not enough to be worthwhile getting one of these instead of paying down credit card debts (expect 0.5%ish outside of promotional periods) but it’s a nice little extra on top. Just don’t fall into the trap of spending more because you think you’re getting something extra in return!
This is simply….additional cash! If you’ve a payer off in full every month and you don’t have a reward card per your other option below, it’s so much more sensible to have at least a free version of one of these rather than the bog standard credit card above.
Check back – we’ll run through the best cashback cards in a future article.
Option 2: A rewards credit card
If you’re more interested in gaining a service than money, then you might want to consider a rewards credit card. These give you something of value, such as air miles for each pound that you spend. The most popular ones are airline or hotel partner cards.
You’ve got a few options here. Either you can go with a “broad brush” card where you earn generic points and can transfer them into a specific loyalty scheme at a specific date, or they earn miles directly for say, a particular airline only.
Your choice is really between breadth and depth. The broad brush cards aren’t as rewarding but allow you to have a lot more choice in terms of what you can spend your points on. The airline/hotel cards give you more but only for their schemes.
The biggest thing to consider is simply….. will I use it? A reward for air miles that you’ve never going to use is simply a lost bonus – much better to have the extra money from the cashback credit card instead.
Check back – we’ll run through the best rewards credit card (and some other thoughts on these) in a future article.
And that’s it! If you have any further questions on these cards, please comment below.
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