A Techbro Guide to Paying with Plastic
How and why to pick your credit cards and make them work for you
Disclaimer: I am not a financial advisor, accountant, or tax expert, nor do I claim to be. The information in this post is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation. This is purely my own experience trying to learn personal finance and build a better future.
Credit cards can be a powerful tool for building credit and earning rewards, but choosing the right one and using it responsibly can be overwhelming. For one thing, they are everywhere. Every department store offers you a credit card on your way out the door, so choosing the right cards is subject to choice overload. Not to mention the danger that the reduced friction represents to your finances. Americans are nearing $1 trillion (with a T!) in credit card debt, a terrifying reality that needs to turn around fast. It cripples our credit and personal finances, so we need to use these bad boys not only responsibly, but also to make the most of the benefits they offer.
Assessing your Credit and Choosing a Card
An important part of using credit cards is that you understand their relationship with your credit score. Credit cards can be great tools for developing credit and growing your credit score, which will pay dividends in lower interest on big purchases down the road, but your options are more restricted when you don’t have as much credit history or haven’t managed it well in the past. Credit is a complex topic that deserves its own article. However, suffice it to say that - in a somewhat backward way - getting approved for credit requires that you have shown an ability to use credit responsibly in the past. Thus, entry-level credit comes with much less bang for your buck, and paying with cash in full won’t allow you to build credit. However, almost all of us need credit eventually for mortgages and car payments, so we still have to build it. 😕
For this reason, many students and young professionals get a starter credit card. These are a double-edged sword since they allow you to build credit and take advantage of the benefits but they also saddle you with a low credit limit and astronomical interest rates. Often, these cards can also become enticing for students to buy things they can’t afford, which is antithetical to the whole goal of a starter card. These should be used on normal purchases as a tool for building credit, and using credit cards should not change your spending habits.
Using credit cards should not change your spending habits.
As you build credit and improve your score, you’ll have more cards available to you. Credit card companies will let you know this constantly with new offers for cards and even offering hundreds in sign-up perks and pre-approvals. It’s important to actively seek out a new card when the time is right for you, and not just apply on a whim. There is a reason these companies are advertising to you so heavily; because it makes them money when people juggle too many cards, use them too much, and end up paying interest! So be deliberate about applying for credit.
This choice often comes down to 2 key points:
1 When should I get a new credit card?
To decide on when to apply for a new credit card, first consider why you need additional credit. Do you have more income and have incurred additional expenses as you move into a new place and start your career? This is a very common situation where it makes sense to apply for a new card for more access to credit and to increase your limit.
On the flip side, you shouldn’t be applying for new cards to cover additional expenses with no correlating increase in income. Applications will want to know your income so they have a reasonable expectation that you can afford to make the payments.
It’s ultimately beneficial to keep your credit card picture simple. You should have no more than a handful of cards that all offer you something valuable. I prefer to use no more than 3. It’s easy to keep track of and still reap the rewards they offer. Closing cards is a personal decision, and while keeping recurring payments on an old card for the credit and limit boost can make sense, the simplicity of only managing a few can still win out.
Also think about how recently you have applied for other cards or needed to use credit checks (like car payments, apartment rentals, or mortgages). These result in credit inquiries and can negatively impact your score if you rack them up. They’ll fall off after a couple of years but it’s still worth considering if you don’t really need a new credit card.
If you have established a real reason, can afford the payments, and won’t incur unnecessary damage from submitting the application, then perhaps a new card makes sense for you. Some examples are looking to increase your credit limit so you can have lower utilization (which increases your credit score), needing some additional access to credit as you start your career, and when you start to qualify for additional cards that offer new benefits like travel or additional cashback that you couldn’t access prior. But how do I pick a card?
2 What card should I select?
Choosing a particular card comes down to a number of factors as well. The main variables are the fees and interest rates, the benefits, and your credit need. First, narrow your choices to those you think you can qualify for. From there you can balance out these variables to make a smart financial decision for you.
Interest rates get a lot of attention because they are so damn high, and not paying the bill in full and accruing interest on a credit card can be such a crushing predicament. However, you are financially proactive and are not going to run into this problem. You will never carry any balance on a regular credit card. I’m speaking it into existence here, but the burden ultimately falls to the individual. There are situations where it might make sense, but in general, you should avoid this at all costs. With this realization, you should choose cards with low fees like annual fees and late fees (so should you forget once it’s no big deal).
You should also select cards based on your credit needs and how they will most benefit you. If you need a higher credit limit so you can bring down your utilization, then do some research on cards that will give you a decent limit. You can also hack this by calling your current card providers and requesting credit limit increases since you’ve shown you’ll pay on time and in full. Often just a little nudging and showing a good credit history with them is all it takes.
Finally, the benefits of a card are a huge consideration. Sign-up bonuses shouldn’t be ignored, but if you don’t want to keep opening new cards and closing old ones it would be better to focus on sustainable benefits like miles, cashback, and rewards. Occam’s Razor y’all.
A good cashback card is the backbone of your credit card collection since it will allow you to get a discount on any purchase you make. Once you’ve solidified your collection, consider cards that support your common purchases or will facilitate steep discounts on future purchases. These can help out with gas, groceries, dining, and travel to name some popular categories. If the shoe fits as they say, so take stock of where your dollar bills like to hang out and plan accordingly.
Maximizing Rewards and Benefits
Credit card rewards really do save us time and money, so being aware of the various options and leveraging them can be a nice boost to the pocketbook. For instance, credit cards are very easy to cancel and some even offer pauses and other ease-of-use features that make stolen card details less scary. They’ll proactively detect fraud and contact you, and then send a new card within the week if needed. But the big one is the benefits we get when we use the cards.
As previously recommended, it’s nice to have a solid 1.5% or 2% cashback card to keep our savings floor high. Then, we can use our other cards on specific expenses to save even more. Chase cards can offer 5% off when you book travel with them, so don’t forget about that for hotels or just because your travel/miles card (if you choose to have one) doesn’t fully cover your plane tickets.
Most cards allow you to simply add cashback to your monthly payment, and it’s simple and easy to do. But, if you really want to stretch your rewards, often you can get gift cards at a discount with your points/cashback balance. I tend to use this whenever I need workout gear since I can get an additional 10% on Under Armour gear this way, but I’ve even seen discounts at Apple when you pay with points.
Benefits vary by card, but make sure you’re aware of all the card offers and take advantage of the rewards and security features. Sometimes new features can even be added, like when Delta recently added a 15% discount on paying with miles. Your card company should let you know when this happens, so keep your eyes and ears open.
Managing Credit Responsibly and Avoiding Pitfalls
Now, the most important part of credit card use is how to keep them as a tool for helping your wallet and not something that will create debt for you.
First, it's important to establish a budget. I’ve mentioned this extensively, but you absolutely have to have a keen eye on your finances and be honest with yourself about how much you can afford. Track your cashflow. It’s essential.
Here’s my favorite trick for avoiding any problems with credit cards. It’s simple. Just consider that credit is debit, and you'll have to pay back everything you charge, plus interest. It’s easier said than done, but you should not buy things you can’t pay for outright. Using a credit card is just a tool to get some of the added benefits. If you can’t stick to this, cut up your credit cards and just use debit. It’s the only way, that high interest will destroy any long-term gains you’re hoping for. This also means not buying things just because you can get rewards. The rewards are a side effect.
An important mindset is that credit really is debit, do not spend money on a credit card that you do not have readily available to spend. Credit cards are tools for added benefits. Take advantage of them without letting them take advantage of you!
Finally, it's a requirement to pay your credit card bill on time and in full each month. Not only will you otherwise accrue a scary amount of interest, but it’ll also hurt your score if you don’t make the minimum payments on time. The ultimate goal is long-term financial health and growth, and remember that credit cards are a tool that should help to move you down that path.
My Wallet as an Anecdote
Before I bid you adieu, I’ll share how I manage my credit cards to make the most of them. I’ll outline each card and why I have it, starting with the student card that I got in college. I have 4, but I only carry 3.
I started with a Discover It card in college because it was one I could be approved for as a student and it came with reasonable perks. I didn’t plan on ever incurring interest, so I wasn’t overly concerned about the 28% interest (even though that’s egregious). I got at least 1% on everything and 3% on gas, while I still take advantage of the latter. As an added bonus, they also gave double points for the first year and the Discover gift card rewards are fantastic.
Once I could apply for something with a higher credit limit that would serve as a better backbone, I went with a Chase Visa card that would always get me at least 1.5%. It comes with many other advantages like the Chase travel discount and 3% cashback at dining and groceries locations.
From there, I was in the market for a particularly expensive piece of jewelry. While I had more than enough to pay the full amount, it would eat into my emergency reserves. The vendor I purchased this particular piece of jewelry from offered a card at 1-year 0% interest, so I opted to pay half up front and carry the rest on the card. Frankly, I wasn’t fully comfortable even with this setup, but since I had the funds if I really needed them and knew I could save that amount in well under a year I was confident that it was a useful option. This way I had emergency reserves if I absolutely needed them and they could earn 3.5% interest in my HYSA while I also saved up to pay the remainder.
Finally, my fiance 😏 and I also opted for a travel card that would help us with plane tickets and help cover the honeymoon. Since we live near a Delta hub, we went with the AmEx Delta Gold card, and the signup bonuses allowed us to cover two additional sets of plane tickets right away and wave the yearly fee. Essentially, it will allow us a 15% discount on our tickets, and the first two and our honeymoon tickets will all be free. The card is also especially good on miles for groceries and our wedding expenses.
With these cards, I use the AmEx for groceries, the Discover for Gas, and the Chase for any other expenses that fall through the cracks. They give me great reward coverage and keep my credit card picture simple. I’ll pay off the card from the jeweler well in advance and probably close it since I don’t intend to ever use it.
To conclude, credit cards can be a valuable financial tool for us young tech professionals, but it's paramount to choose and use them wisely. By being intelligent and thoughtful with your card choices, you can select the right credit card for your needs, maximize your rewards, and manage your credit responsibly, setting yourself up for long-term financial success.