#005 | The 4 Golden Rules of Credit Cards
A blueprint to maximizing the benefits of credit
Hey friends,
Credit cards can either be powerful financial tools or toxic sources of debt - it all depends on how you use them.
On one hand, credit cards are a great way to optimize your spending.
They allow you to earn rewards on purchases while building your credit history, which together can save you tens of thousands of dollars over the long term. Additionally, they tend to provide better fraud protection than debit cards.
Conversely, credit cards are one of the biggest wealth killers when they’re misused.
They enable overspenders to accumulate debt, typically at interest rates of 20% or more.
Many of us already understand the power of compound interest, but credit card interest compounds against you daily.
You can either master credit cards or become a slave to your lender - follow the 4 golden rules in today’s newsletter, and you will learn how to squeeze the credit card companies for every penny:
Choose a credit card that aligns with your lifestyle
Keep your credit utilization below 30%
Pay your statement balance in full every month
Take advantage of the float and earn interest on idle cash
1. Choose a credit card that aligns with your lifestyle
Your credit card should align with your spending habits and provide rewards you will actually use.
First, think about where you spend the most.
Common spending categories include flights, hotels, restaurants, grocery stores, gas stations, and more. Your card should offer the most competitive rewards in your biggest spending areas.
Once you find credit cards that align with your spending habits, further narrow down your search by identifying the rewards you value most.
Are you a frequent traveler? Consider travel cards for points and miles that are redeemable for flights and hotels. They may also include perks like airport lounge access, TSA pre-check, Clear access, travel insurance, and no foreign transaction fees.
Alternatively, you can choose cards that offer cashback to offset your spending in other areas, such as restaurants and grocery stores. Some people even opt to invest their cash back!
It’s important to actually redeem your rewards - when they sit idle, travel points can be devalued by your credit card issuer, and cashback can be eroded by inflation.
Finally, you should also consider a card’s potential sign-up bonus. If you can comfortably meet the spending requirements, these bonuses provide immediate value.
Now that you’ve selected your credit card, let’s discuss the three best practices for using it.
“You wanna know what's more important than throwin' away money at a strip club? Credit”
—Jay Z
2. Never spend more than 30% of your available credit
Credit utilization is the percentage of credit you have used compared to your total available credit.
If you have a $10k credit limit, this rule implies your credit card balance should never exceed $3k.
Credit utilization is a significant factor in determining your credit score. Keeping it below 30% shows responsible borrowing behavior and improves your creditworthiness.
If your regular spending is higher than 30% of your available credit, there are a few solutions:
Make multiple payments a month
Use multiple cards and distribute your spending across them
Contact your credit card issuer and request a credit limit increase
Reduce your overall spending, or use cash and debit cards as necessary
3. Always pay your statement balance in full
This is the most important principle of responsible credit card use.
When you pay your statement balance in full, you avoid accruing interest charges and carrying debt from month to month. This is why the interest rate on your credit card doesn’t matter when you use it correctly.
To keep your statement balance manageable, never make a purchase you can’t afford to pay off immediately.
If you can’t afford to make a purchase with cash or a debit card, then you can’t afford it with a credit card. Simple as that.
Creating a budget and monitoring your accounts can help you avoid overspending as well.
If you can't pay your statement balance in full, at least make the minimum payment... but never miss the payment completely.
The penalties can be drastic and include:
Loss of benefits and rewards
Significant drops in your credit score
Potential default, which can lead to legal action
Late fees and penalty interest rates on top of your normal interest
I know people with 750+ credit scores who missed a single payment and saw their scores drop 100+ points overnight!
Enable automatic payments for your credit card to reduce the risk of this happening to you.
4. Take advantage of the float to earn additional interest
This is my “secret sauce” to getting the most out of credit cards.
When you use them to make purchases, you have 30-60 days to pay the balance off before it starts to accrue interest. This grace period is called the “float”.
Your lender essentially provides you with a free short-term loan during this time, which creates an arbitrage opportunity.
Here’s how I capitalize on it:
Once I have done my routine saving and investing, the remaining cash in my checking account is my “fun money” that’s available to spend.
Whenever I make purchases on my credit card, I transfer the amount I’ve spent from my checking account to a high-yield savings account (HYSA).
Thanks to the float, the money I’ve “spent” and set aside now pays me interest until the statement balance is due.
My HYSA currently pays 5% APY on a balance that averages $3.5k, which translates to an extra $175 of interest income per year.
Note that this $175 is in addition to the rewards I receive from the credit card.
This also makes it easy to monitor my spending, because I always know how much “fun money” is left in my checking account after these transfers are made.
This method isn’t commonly talked about, but it’s a savvy way to offset your spending or generate additional income to save and invest.
Conclusion
Credit cards are great when they’re used responsibly - I’ve received thousands of dollars worth of benefits without ever paying a penny of interest.
I fully acknowledge that they’re inappropriate for most people though.
It’s very important to use them mindfully, as there are plenty of common pitfalls that you can fall into.
Be honest with yourself - if you don’t follow a budget and struggle to track your spending, don’t use credit cards. They enable you to spend money you don’t have, which is a slippery slope that can lead to unmanageable debt and tremendous stress.
That’s all for today - thank you for taking the time to read!
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