Credit Card Management

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.  That means no Sears, no Best Buy, no Macy’s, and no other store credit cards — they may actually hurt your credit score.  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 (or more), 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” — every month has a minor 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 are two reasons:

• It is extremely hard to save.
• You need an emergency fund — for the next emergency.

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.

You need an emergency fund — for the next emergency.

Misery likes company.  You may have had a hard time now — but you still have a job (hopefully — or other source of income).  If you can still handle the monthly payments of this emergency, keep your emergency fund.  Keep it for that day when you do lose your job or are forced to leave it (we all do, at some point).

Other bloggers take on credit?

• Stop Buying Crap - Credit 101
• Budgeting Babe - Credit 201
• PF Blog - (Writings) - (Readings)
• Radical Guides - 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.

(Originally written on June 06, 2005 and recently updated for clarity).