Smart401k Blog

Credit cards can be your best friend or your worst nightmare. When used appropriately, they provide a convenient and efficient way of making purchases. Whether it’s filling up your gas tank or buying groceries, a credit card can speed up the purchase process and keep you from having to carry around a pile of cash or fumble through a pocket of loose change. They can also help you build a credit score that will be used in determining the rates you’ll pay on loans, like mortgages. Unfortunately, if you spend too much, even the best credit card in the world isn’t going to be able to help.

As an Investment Adviser, I talk to a lot of individuals about credit cards and credit card debt. A recurring topic of these conversations is figuring out which of the thousands of different credit cards is the most appropriate for your lifestyle. These days, it seems like every time we open the mailbox there’s a new credit card being offered. And it never fails, BIG BOLD LETTERS on the envelope advertize a great feature that we absolutely must have. As overwhelming as these offers may get, there are a few simple strategies to keep in mind when deciding which type of card is right for you based upon the following lifestyle trends.

Always Pay Your Balance and Only Charge Small Amounts

If you always pay your balance in full, the rate being charged by a credit card isn’t a big concern. Instead, you should look for a card that doesn’t charge an annual fee and, if available, offers some type of cash back reward. Most of the cards that offer huge rewards charge an annual fee and require that you spend thousands of dollars a month to build up the necessary points to earn a benefit. If you’re not spending enough to earn these points, there’s no sense in paying the annual fee. While a simple 1% cash back might not sound like much, think of it as getting a 1% discount on everything you already planned on buying.

Always Pay Your Balance and Charge Large Amounts Each Month

If you’re going to spend the money, you might as well get rewarded! Some type of cash back or rewards card will make the most sense for you. Take a look at your spending habits and find the areas you spend the most. You can then find a card that offers bonus points when you spend on that category. If you do a lot of driving, high cash back rewards on gas and convenience store purchases would make sense. If you travel a lot, hotel points and frequent flier miles would be a good benefit. While an annual fee may be charged on this type of card, the benefits you receive could outweigh the cost – just be sure you know how much you have to spend to earn the benefit. For example, if you sign up for a gas card that offers 3% cash back on gas purchases, but imposes a $50 annual fee, you need to spend roughly $1,700 on gas before you start to earn a benefit above the annual fee.

Carry Balance and Only Make Minimum Payments

If you carry a balance on your card, the last thing on your mind should be cash back or rewards points. Right now, your focus should be on getting the card paid off as quickly as possible. If your card currently has a high interest rate, you might want to look for a card that offers a lower, fixed rate and allows you to transfer your balance. Some cards even offer a 0% introductory period. If you can pay off your balance during the introductory period, this might be a great option. However, be cautious of what the rate will jump to once the grace period ends. This situation should also cause you take a look at your spending habits. If you’re constantly spending more than you can afford, it would be a good idea to review your budget and figure out where you can cut-back.

When evaluating which of the above categories you fall in to, it’s important to be honest with yourself. While you may claim that you’ll pay off your full balance each month, if you haven’t done this in the past, how much can you trust that you’ll start doing it in the future? A great online resource from Bankrate.com is their “Find the Best Credit Card” calculator. By answering a few simple questions, the program will generate an answer for what type of card is best for your personal situation. The link to this calculator is below:

http://www.bankrate.com/calculators/managing-debt/find-best-credit-card.aspx

While it may be impossible to determine exactly which card is the best, it’s important to choose the type of card most appropriate for your lifestyle. Remember, nobody becomes a millionaire by cashing in their credit card points. Instead, it takes a devoted long-term strategy of living within your means. If you have questions about credit cards or credit card debt, or are looking for help with developing your long-term investment strategy, call Smart401k today.

Joe McCulloch, Investment Adviser

This entry was posted on Wednesday, February 24th, 2010 at 10:16 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.