How to Use a Credit Card Responsibly [Take Advantage of our Reliable, Easy Guide]
Introduction to How to Use a Credit Card Responsibly:
A Quick Story of My Friend With 50 Credit Cards!
Many of these strategies will fall under what’s known as credit card churning, which is an entire community you can dive deeply into. Note that all these strategies are possible without getting into credit card debt!
I was introduced to the world of credit card churning when I made a new friend one day who was heavily into real estate. He happened to mention that he also had at one time had 50+ credit card accounts open at the same time!
I found this intriguing and surprising and of course grilled him on why he would want to do that. I couldn’t believe someone could keep track of that many credit card bill, monthly statements, and monthly payments and be using their credit card responsibly.
It turns out that by carefully tracking and taking advantage of the exact terms and conditions of credit card opening offers, you can actually make a small amount of money (or earn a lot of points and redeem them for things like vacations!
Haven’t credit card issuer companies shut this down already?
We are probably past the heyday of credit card churning since credit card issuers quickly caught on and shut down some of the more lucrative ways of making money. However, they haven’t completely shut things down, after all, they still want to entice new customers to sign up, and there are still benefits to be gained through responsible credit card use.
Do I need to pay more than my purchase prices for any of these benefits?
None of these methods will require you to pay interest charges, take on high-interest debt, pay annual fees, late payment fees, account fees, foreign transaction fees, or anything of the sort!
On the contrary, this is all about how to use a credit card responsibly and how to use a credit card wisely.
Most people need about 5 credit cards to max out their credit score
(The full answer depends on how many other debt accounts you have open)
The first ‘advanced’ strategy isn’t really about credit card churning (we’ll get to that quickly) but more about using credit cards to max out your credit score with the credit bureaus. While the official credit score algorithms from the three credit bureaus remain a closely guarded secret, over time people have mostly figured out what the most important drivers are and roughly how they’re weighted. It turns out that part of getting a high score is having several different types of debt and having at least 5 debt accounts open. The logic behind this is that it shows that you are more responsible if you demonstrate your ability to consistently repay multiple debt accounts of multiple types.
So, depending on the rest of your financial situation, how many other debt accounts you have open, you should use credit cards to get to a total of 5. You also may want to open a new card when you close out a debt account to keep 5 open like when you finish paying off your student loans, pay off your mortgage, or close out a personal or car loan
Having multiple cards open will also help increase your credit limit and decrease your credit utilization ratio.
How do I use my credit card responsibly? How many cards do I have?
I have none of the above types of other debt – so I currently have 5 credit cards open! I’m probably getting hit a little since all my debt accounts are of the same type, but fortunately, I have the other types of loans in my credit history and payment history, which probably helps (again we don’t know for sure since the credit agencies won’t tell us the exact way they calculate scores)
Use Each of Your Credit Cards At Least Once Every 6 Months to Avoid Account Closure (but still avoid credit card debt!)
Once you have multiple credit card accounts open you will need to make sure you’re spending often enough to keep the account open. If you have a credit line open, but never spend anything on it, maybe because you have a better rewards rate on another card, the card company will eventually close the account due to inactivity. Similar to a bank account, your credit card company wants to see at least a few purchases or other activities to make sure it’s worth it for them to keep the account open.
How long they will wait and how much notice they give will vary from company to company. It will also vary by things like how long you’ve had the card account and how often / how much you have carried a balance in the past
Additional benefits to regular spending
Using your credit card regularly for everyday purchases, while making on-time payments, can also help you eventually ask for a higher credit limit, which in turn makes it easier to have a lower credit utilization ratio, which in turn helps you gain a good credit score. This is how your get good credit scores, avoid late fees, earn rewards and use credit cards responsibly!
From what I’ve seen most card companies will start the closure process after ~6 straight months of inactivity, but this usually includes giving you notice and a chance to start spending. This means you had no credit card balance, or credit card purchases, for 6 straight months.
How I think about regular card spending
My rule of thumb is that I just try to put something small on each card every couple of months. I don’t track this too closely, but you might consider doing this, especially as the number of cards you have goes up. Remember that many credit card issuers have their own rules around account inactivity, so if you’re in doubt check with the card issuer.
No ongoing minimum spend required
Something that surprises me is that I don’t see credit card companies requiring a periodic minimum of spend in their card agreement or in their credit card’s terms. Many or most require an initial spend to get the sign-up bonus, but then count any amount of spend in a given billing cycle going forward as good enough to keep the account open.
Perhaps there is a law or regulation I’m not aware of forbidding this, but if not, it won’t surprise me if this becomes instituted at some point in the future, as card companies look for ways to weed out customers who are just collecting benefits but never actually carrying a credit card balance.
We shall see!
If You Have a Rewards Credit Card, Track Special Offers Closely! Many Have Hidden Gimmicks So You Don’t Get the Full Reward
Alright, with those out of the way, we can now move onto some actual churning strategies
The first, and probably easiest, is to carefully track the categories of higher rewards that your cards offer and maximize those first. So, if you have one card that offers a flat 1.5% back on all purchases and another that offers 2% back on gas, make sure you use the higher offer at the gas station
Seems simple enough right? Just remember which card offers the highest rate in different categories and always use that right? Actually, not quite, there are a couple of wrinkles to consider to actually optimize your rewards rate
Monthly and/or Quarterly Spending Caps Make Tracking More Difficult
The first trick here is that almost all of these cards have a monthly or quarterly cap on how much spend qualifies for the higher rate. Sticking with our example of a card with 2% on gas, often there will be a cap saying the 2% only applies to the first $1,500 in purchases in gas stations, after that it drops back down to 1%. So in this example, after you had spent $1,000 on gas on the card that gives 2% back on that, you would actually want to switch back to your 1.5% flat rate back card for any additional gas purchases for the rest of the month.
If you spent an additional $1,000 of gas that quarter, making the switch in this example would only net you an additional $5, however, so you should really think about whether the effort to track all of this is worth your time and mind share. I’ve reached a point where I don’t really give this kind of optimization much thought unless I’m making a significantly large purchase.
The Highest Reward Categories May Be Changing and/or May Require Activation
The second wrinkle is that there has been a trend in the past few years by credit card companies to offer compelling headline reward rates, like up to 5%. These higher rates often come with the additional wrinkle that the category either switches every couple of months or you have to actively log into your account and choose your monthly category every month. Obviously, the card companies do this hoping they will attract customers with the exciting number, but most people in most months will forget to ‘activate’ the offer and the company won’t actually have to pay it out, so you have to remember to do this.
Similar to reviewing your account regularly, checking account statements, always making at least the minimum payment, and keeping track of your available credit (credit limit), you would have to get into the habit of keeping track of this math.
Higher Rewards Amounts, like 5%, May Merit the Effort
If you take advantage of one of the cards with higher rates like 5%, it may become worth it to track things a little closer, since unlike in our gas example of 2% vs. 1% the 4% difference between 5% and 1% can become non-trivial at lower levels of spending. Up to you! An example of this is if you make a lot of online purchases with Amazon, you may want to get their card that offers 5% back for purchases on their website.
Churning account opening offers
One of the most popular credit card churning tactics, and the reason my friend from our opening story had 50+ cards, is to frequently open and close new cards to take advantage of the sometimes generous offers companies give for opening a new account. These offers tend to range from $300-$1000 in worth at writing for respectably nice cards
So How Exactly Do You Take Advantage?
The strategy is simple you simply open a new card, meet whatever requirements there are to receive the reward – often a minimum spend of a few thousand dollars in the first few months of account opening, and then close the card later, frequently at the one year mark as that tends to be a requirement to keep the account opening reward package.
Pretty straightforward right?
But the plot thickens…
Of course, the card companies caught onto this a few years back and have made things a bit less lucrative, since it’s not a great deal for them!
One way they’ve made churning less lucrative is to require that you can only receive the full benefit if you haven’t also received an account opening benefits from their company within the past 48 months (different companies may have a different time requirement, but 48 months is the most common at writing)
This isn’t really too big of a deal since there are so many companies opening cards, if you only want to have the optimal number of 5 open at any given time you can easily rotate among the big companies every few years. If you want to be like my friend though and have, what I would call a ridiculous number of cards open, this will make it tougher to do that while sticking with the bigger companies
There are downsides to this strategy
Another drawback to churning is that you will almost always have a small ding on your credit report for having one or more new accounts recently opened. This should be a relatively small hit, though, so not a big deal. And there is a limit to how much of your credit score is made up from recent account openings.
Another way companies have made churning hard in recent years is to require higher and higher minimum spending after opening before you earn the full benefit. Many are now getting into the $3-5K range within the first 3 months. This should be no big deal if you’re only churning a couple to a few cards per year (obviously depending on your typical monthly spend rate), but gets harder if you’re trying to be like my friend and do A LOT of churning
What About the Credit card Company’s Perspective
So why do credit card companies offer these sometimes lucrative account opening offers? They obviously know that some people will simply close the account after earning the benefit. But the card companies have done their homework and know that enough people will not immediately close their account and will eventually have a revolving balance (that’s when you don’t pay the full bill and incur interest charges), that they will make enough money off of those people to make it worth the offer.
Still, whole communities have arisen to track, take advantage of, and optimize these offers. Watch out for credit card companies continuing to find ways to make it only worth it for customers who will actually carry a balance – and you definitely do not want that to be you given their extremely high-interest rates!
Summary and Conclusion
We hope you’ve learned a bit about how to use a credit card wisely!
1. Make sure you have enough credit cards so that you have a total of 5 debt accounts open at any given time
2. Spend a little on each card every couple of months to keep the accounts active
3. Consider tracking what categories have the best offers for any given purchase. Consider if the offers you have on your cards merit your time to optimize
4. Consider tracking more closely cards that have more lucrative offers, like a 5% rewards or cashback rate
5. Consider closing 1-2 cards per year and opening 1-2 new ones to replace and take advantage of new account opening offers. Check that you’re still eligible for the offer if you’ve previously had an account with the new card company
And don’t forget the basics of responsible credit card use
- Track balance transfers incredibly closely and always fully payoff before the end of the promo period to avoid accruing debt and creating a bad credit report
- Stick to your spending limit and always know your available credit
- Always make timely payments within the grace period (consider automatic payments)
- Know your cards annual percentage rate (APR) and any other account fees
- Build credit with NO missing payments ever (gets you better credit scores!)
- Avoid using a credit card for cash advances, debit cards are better for this
- Every billing cycle check for credit card fraud or missed payments (remember, though, you probably have fraud protection)
Maintaining good credit is literally a lifetime game. If you can’t use a credit card responsibly and always pay within the grace period, consider using a debit card or secured credit card instead. Your credit score might actually be better in the long run, believe it or not. It is very possible to use credit cards regularly and wisely.