Is It OK To Use Credit Cards For Everything, If You Pay Them Off Every Month?
Reader Rebekah has a question about credit cards. She and her husband pay off their cards every month, but like to charge most of their expenses because they enjoy the reward points. She's wondering if this is a good idea and how it affects her credit.
Rebekah asks:
I was wondering about Credit Cards. Specifically having to do with keeping multiple with no balance vs. none at all. How much does your credit rating get hit when you open a credit card, even if it is a store card? My husband & I pay off our credit cards every month but put everything on them for points reasons & to track our spending. We like to take advantage of the credit card offers with points attached to them since its an actual reward you can use, but is it really worth it?
Would we better off in the long run paying for the reward to ourselves?
First of all, congratulations on paying off your balances every month! Now, as far as having multiple credit cards open with no balance, I'll assume that we're talking about a few credit cards -- and not some crazy high amount. Sound fair? Ok.
There are several factors that go into your credit score. You're asking about two of them: Recent credit inquiries, and total available credit.
Credit inquiries fall in a section of your credit score called "New Credit." This section makes up 10% of your total score. When you apply for new credit, (like a store card, or a credit card) a note is made on your credit report and it is figured into the "New Credit" portion of your score. Everyone's credit is different. Here's how Fair Isaac, the company that issues FICO scores, explains the situation:
Inquiries are a subset of the "new credit" category shown above, which accounts for 10% of the total FICO score. Their importance depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history.
...
For many people, one additional credit inquiry (voluntary and initiated by an application for credit) may not affect their FICO score at all. For most people, a credit inquiry will only decrease their FICO score by a few points.Inquiries can have a greater impact, however, if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk: People with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports.
So unless you've applied for six credit cards in the last few months, you should be OK, which is why for the sake of this answer we're assuming that you're not a compulsive credit card collector.
Now, on to the second part of your question. Is it OK to have multiple credit cards with no balances? Yep, that's just fine. Having multiple cards affects your "credit utilization ratio." Only you know how many cards we're talking about here, but the basic idea is that your credit score is affected by how much of your total available credit you've used.
Think of all of your credit cards as a big pizza. When you borrow money, that's like eating a slice of the pizza. The FICO score reflects how much pizza you have left. When you close an account -- you're starting with a smaller pizza!
Now, this doesn't mean you should go out and apply for 90 million credit cards, but it also means that you shouldn't worry about having more than one card.
Here's how Fair Isaac explains it:
Say you have 3 credit cards. Credit card 1 has a $500 balance and a $2000 credit limit. Credit card 2 is an unused card with a zero balance and a $3000 limit. Credit card 3 has a $1,500 balance and a $1,500 limit. In this scenario your credit utilization ratio looks like this:
Total balances = $2,000 ($500 + $1,500)
Total available credit = $6,500 ($2,000 + $3,000 + $1,500)
Credit utilization ratio = 30% (2,000 divided by 6,500)Now, if you decide to close credit card 2 because it's an old card that you never use, your credit utilization ratio looks like this:
Total balances = $2,000 ($500 + $1,500)
Total available credit = $3,500 ($2,000 + $1,500)
Credit utilization ratio = 57% (2,000 divided by 3,500)You can see that your utilization ratio rose from 30% to 57% by closing the unused credit card.
And finally, are credit card reward points worth it?
If you follow a budget and are not spending more in order to "earn" points -- then yes. There's nothing wrong with using a credit card to collect points on things you would have bought anyway. The trouble is that many people don't actually do this.
Reward points are there to get you to spend more, and if you're worrying about it enough that you're writing in to us, perhaps you should take a look at your budget and decide if you're really getting a good deal.
Will closing a credit card account help my FICO score? [MyFICO]
Credit Inquires [MyFICO]
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I put almost everything on my main credit card. I get 1.25% cashback on all purchases, and pay it off every 2 weeks. I haven't seen a single downside to this, and have seen no adverse effect on my credit score.
Cash is for parking garages and losing prop bets.
Of course she won't be a "prefered" customer since she will pay no outrageous interest, over the limit fees, or late fees. In other words, she will be not as profitable as the half-*ssed customers who DO pay those fees since she will only be bringing in merchant charges to the credit card company(ies). Then the card companies will cancel her cards due to "market changes" or some other BS...
I had to buy a car through Drive Time because I had ZERO credit. No, really. None, zip, nada. So, I have a crappy APR rate, but at least now I have a car, AND I finally got approved for a credit card through my bank (BofA). YAY! I'm trying to use it monthly, mainly on car payments and insurance payments, things that are in my budget already, and then paying them off monthly, so I can build some more actual credit.
Is this the way I should go about it?
my wife and i do this as well - we have usually 1-2k charged per month total, spread among 2 cards - we get cash back, so we put everything we can on those cards to get the most back :-)
There's nothing wrong with paying off the cards each month. I think all 3 credit reporting agencies take a "snapshot" of the total debt of your card for each billing period. So it really doesn't matter if you pay it off. Your credit report will still show your total purchases and your ability to pay them.
Definitely not good. You've got it half right. You should buy everything with the card, but only make the minimum payments every month.
When you pay it off completely, that just tells the credit card companies that you only want the freebies that you can get with the points. They don't like that.
It is not good for the credit card companies.. and what is not good for the credit card companies is not good for America.
God Bless America..
I use a cash back card (2% from Discover) to buy several $100 gift cards a year. They give me $25.00 worth of gift card for every $20.00 I redeem. While this isn't a ton of money, it does pay for things we need around the house. I would recommend doing it only if you are disciplined and do not end up spending more than you would have. Also, I recommend using a card that allows you to pay online.
I recently applied for a Chase Freedom card and my score dropped 3 points, according to Credit Karma. So I'll now have 4 cards and only 1 will have a significant balance to pay off each month. So it's not that big of a deal.
This is a quality strategy, as long as you control yourself. Some people can't take the temptation, and they shouldn't use credit.
I use the same strategy of paying my cards off every month. I view it as using someone else's money for free, then being paid a bonus on top of that.
My AMEX Blue Cash gives 5% back on gas, groceries, and pharmacy - 5% off in those categories is great! I also get 1.5% back on all my other purchases. (It's 1%/.5% for the first $6500 per year, then the higher amounts take over). I've earned about $300 in cashback since April!
I can't imagine having more than one card.. but then I guess it depends on the limit on your cards..
If you're not living on loans, there are really only a few times you'll actually need a good credit score. I think that by being responsible and not defaulting on debts, you can generally develop good enough credit to get by in these situations, even if you aren't carrying a balance on your credit cards, or engaging in other behavior that makes bankers rich.
PS - Buying a car is not one of those times you should be relying on credit - if you can't afford to save for it and pay with cash, it's probably more expensive than you should be buying.
I do this as well. My two main credit cards are paid in full each month, one of my store credit cards has no balance, and the other has a balance with interest deferred. Never a problem for me and with the miles, I have a free ticket to go to a bowl game this year.....hopefully.
@econobiker: It's never been my experience that they actually do this...and I've been putting everything on credit cards and paying it off in full for a long time now. I've saved a lot of money in cash back by doing this.
I put everything on my card and just pay the full balance at the end of the month. Citibank must hate me. They have never gotten a cent of interest from me, but have paid out like $500 in cash back to me.
@teh: There are no real adverse effects as long as you a) have enough available credit lines that your monthly spending doesn't consume too large a percentage of them; b) don't spend more to get rewards points (this depends on what sort of psychology of spending you have, but I suspect this isn't a problem for most people who actually do pay off their bills in full every month), and c) you actually pay your bills in full.
I use my Credit Card for a lot. I get 2% off on gas and restaurants and 3% off at Amazon and 1% on everything else. I can redeem the cashback in gas cards or Amazon gift certificates. Since I love Amazon so much, it makes sense to me.
I also put almost everything on my main credit card and usually only carry a small amount of cash. The credit card payment is automatically debited from my checking. The card has no annual fee and I get rewards.
Assuming that you always pay it off [a big assumption for most people] and incur no fees or interest, the only disadvantage is that you might spend more when using a credit card vs. cash. It's a lot easier and safer than constantly using the ATM and keeping cash.
Years ago I felt self-conscious when charging something for $2 or $3 but not anymore. The trend is definitely toward using credit and debit cards for small purchases, such as fast food, coffee, and even subway rides. The issuers certainly encourage it and the store employees simply don't care, they may even prefer it because they don't have to make change or count as much cash at the end of their shift.
Definitely use a credit card over a debit card because of the potential dangers if a debit card is compromised.
I do exactly what the post says, and I have a pretty high credit score. If it's something I think I might have issues with or might have problems returning, I put it on my Amex. Same goes for Gas; 3% cash back on that on my amex. Everything else goes onto my Continental Mastercard; it's paid for a roundtrip trip to Israel and another roundtrip from NYC to California.
So long as you know what you're doing, you can actually reap benefits from the credit card awards, while still keeping your credit score healthy.
I have 3 rewards cards that I pay off every month, and I put expenses on the card that gives me the most cha-ching.
Chase Rewards -- 1% on everything and 3% on top 3 common spending categories (but excludes restaurants)
Chase Home Improvement rewards ... 3% at hardware stores which pays off for my many rental property upkeep expenses
Discover -- has rotating 5% bonus categories where you can ring up major returns; also around 1% for other purchases (but less than 1% on first 3000 though so I use it less except for in bonus categories nowadays); also can often double your bonus on gift cards to certain stores
I also pay off my balances in full every month, but have been considering opening a second card to help with the credit utilization ratio that you talk about. I've had my eye on a WaMu credit card for their free credit score service, but am hesitating now for two (obvious) reasons:
1) I feel like opening new credit right now would be a bad idea (is it really?)
2) (Big one) WaMu effectively doesn't exist anymore.
Is there another card that offers this service? Or will Chase continue to offer this service to WaMu cardholders even after the acquisition? Any recommendations?
I put everything on my card, then pay it back twice per month. Really, really annoys them, which is part of why I do it. :)
@panzerschreck1: Yeah, I got it after I hit submit, because I am slow today. DO NOT LOOK AT THE MAN BEHIND THE CURTAIN HE IS JUST A DUMBASS. Or she. :)
@jchabotte: If you have an American Express, you basically have to have either Visa or Mastercard too...almost everybody takes AMEX, but you've got to be prepared for those who don't.
@TheFuzz53: Don't worry, the merchants you buy from subsidize all the cash back in the form of the merchant fees they pay for each transaction.
@Flame: My GF does the same thing, but BofA (her CC people) seem to like it. They periodically send her thank-yous for being such a good customer.
@Flame: How do you know it annoys them? I've never had any negative consequences associated with responsible credit card use.
@nataku83: true, it's best to wait until you can pay cash to buy a car, but that doesn't mean you should pay cash.
@jchabotte: Having 2-3 probably helps your credit, overall. Plus, a nice benefit is that you can use different cards different places in order to maximize your rewards earnings. For example, you might use one card that gives a higher percentage on gas and groceries those places, and another for restaurants in order to get more there.
We've been using National City's credit card with some nice cash back. 4% on gas (that was quite significant until we stopped comutting), 3% on movies and movie rentals (Netflix took care of that years ago), 2% on food from groceries, restaurants, and fast food, and finally 1% on essentially everything else. They don't send you a check each month, but after you accumulate $100 in "rewards".
We switched from using debit cards exclusively (I'm not a fan of "points" or the lack of protection from theft). Now we get $100+ checks in the mail every few months with our standard purchases. We maintain no balances, so that is all "profit" for us.
@Flame: I do the same thing but I don't understand why that would annoy them. I usually get my new statement by the 5th of every month. I get paid on the 15th and 30th so i pay half the balance on the 15th and the other half on the 30th and it's always paid in full a week in advance of the due date. I would think they love that since they are basically getting paid early and can get interest on it.
My wife and I keep one, or at most two credit cards at a time, and pay them off every month. Ditto what another poster said about the Blue Cash card, just got it :)
One time I called the bank and the person on the other end couldn't believe my credit score. "I've never seen one this high..." I've barely ever looked at it, just pay my bills and pay off the credit card every month.
So my advice is don't stress about your credit score. DO be anal about paying your bills and cards off every month. Works for me, I'm 27 and my score is above 800 /shrug.
@econobiker: Agreed. Me and my wife put everything on cash back cards, and we got $750 back last year. We have been doing it for years, never carrying a balance. We also use as many of the protection services on the cards as possible (extended warranties, free rental car insurance, etc). Never paid any fees to the card. Never had a card cancelled.
The credit card companies don't seem to mind, they get paid 3% of every transaction we do by the merchant, which is more than we get in cash back and services. I bet they would prefer if we would carry a balance, but they haven't cut us off.
I used to do this, but found (once my husband and I combined finances and we read Total Money Makeover and got serious about getting out of debt - most of the debt belonged to my hubby) that I spent a lot more money (basically double) when I used credit vs. debit.
Everyone is going to say that clearly the problem is me and my lack of control and that could be true. But what I found was that when I used debit I knew the money was coming out of my checking account now and that made a difference vs. when I was using credit and just thought about it later when the bill came (and yes I paid the bills in full for years and years). When I switched to debit I was more engaged with my spending, thinking about the purchases and making sure I needed or really wanted to make that purchase.
At this point, I could probably go back to credit and stick to the same mindful habits but I very much enjoy not having a credit card bill. We do have CCs that we use for travel or if we need to make a purchase on which we want the extra protection. And, fyi - I get points for my Visa debit purchases.
@little stripes: I can't comment on Drive Time at all. But using a credit card wisely over time is a good way to build credit. A mortgage and personal loans such as a car loan help as well.
The most important thing is to never miss or be late on a payment, consider automatic debits so you don't have to worry about it or spend time on it or money for stamps. Insurance payments and utility bills are prime candidates for automatic monthly credit card charges. All of my monthly bills are charged to my credit card except for one, which is directly deducted from my checking, and my credit card payments are automatically deducted as well. I pay no monthly bills at all.
Make sure that you scrupulously check your credit card statement, especially if you have charged in restaurants or had refunds.
I know that Ben Stein does this (I was watching a pbs program about credit). The credit cards hate him (and apparently you) because they have no interest to charge, so they don't reap an benefit, no matter how much is charged on the cards.
Hey, he's a former Econ professor and a very intelligent man. If you're doing the same as him, then you can't be doing too much wrong :-P
@jchabotte: The biggest reason that I have more than one card is when traveling. I have seen cards shut down when traveling for charges in foreign countries,even when they were called and told of travel plans. I also put one in the hotel/cruise ship cabin safe just in case my wallet gets stolen, I still have something to fall back on and will not have to stress about how to get by until new cards are issued.
@SadSam: Debit card rewards points are generally inferior to the rewards on credit cards. But to your point, this is why I said upthread that whether this is a good idea or not depends on your spending psychology. For some people, like you apparently, it doesn't seem like real money when it's on a credit card for some reason. For other people, like me, we do all the things you mentioned about being engaged with your spending regardless of what method of payment we use. I don't even consider my credit card use "debt", because I mentally consider the money gone the second I spend it.
Also, a lot of the best rewards points are for things like gas. Even if you just used your credit cards for that, you could potentially get a significant amount of cashback on many cards. And I doubt you're going to burn more gas and spend more just because you paid for it on a credit card, since no one buys gas on impulse. Just a thought for a useful "halfway" point if you don't think you can spend as reasonably on things that give you more latitude of options.
@goodywitch: Ben Stein may be right about this, but I've questioned his intelligence (and his honesty) a bit ever since he went all out with his flaming support for intelligent design.
@briancavner: I can't completely answer your questions, but I can add that I've never had any problems with my WaMu credit card. The 1% cash bach and online credit rating make it well worth it.
I didn't see my rebate check one year because they put it on the bottom of my statement where they normally put those cash-advance-trap checks. The call center did a great job of working and communicating with me.
If you get the offer, I'd call it in or go online to apply instead of mailing it in. The card's website also says JPMorgan Chase now as well. As we all know, its not like your account just dies when the bank is bought.
@little stripes: You don't have to use the credit card to gain the credit. Just having one and not making any late payments is good enough. I had one open for 14 months that I never even used once, and it built my credit up. My score is a 772 and all I've had my whole life is 2 credit cards that I carry zero balance on (I'm 24).
I would say, of course it's good! I have never paid a cent to my credit card company since getting my first card in 1991!! *they hate me* I have the Chase Perfect Card that gives you money back every month. I'm the evil person on the controlling end having them pay me to use their card ;)
I have a Citi Amex that gives me 3-5 points per dollar depending on where I shop, and with every 20,000 points, I get a free flight. I put everything on the card, pay it in full, and earn a free flight every 4 months. If you're responsible, putting everything on a card can get you excellent rewards.
@briancavner: Chase has a big credit card operation. I have a card with them (not via WaMu). They share some operations with FirstUSA (or maybe they bought out FirstUSA, I forget). If the offer looks reasonable, go for it. You can call them up if you want to confirm that they'll still honor the offer now.
You don't really want to have multiple cards with the same bank or even the same processing agent. So if you have another account with Chase or FirstUSA, not a good idea to open another one. It costs you flexibility in doing balance transfers if that becomes necessary or advantageous. Nobody lets you balance transfer from one of their accounts to another of their accounts.
If you can use credit cards responsibly, then they are a powerful tool for managing expenditures, building a credit rating, and racking up rewards points.
I have a Sony Card, and in the several years I've had it, I've used my "sony points" to get, for free, several hundred dollars in consumer electronics (digital camera, bedside clock, etc.) and video games. All at zero cost to me. It was a great deal.
Don't forget that credit cards also carry buyer protections. If you don't receive your product or receive a defective product, the credit card company works with you to resolve the issue. Many credit cards also include extended warranties. For most people, receiving one bill at the end of the month also makes tracking purchases easier.
Like Rebekah, I purchase everything on credit and pay my card off each month. I have a good credit score and have never noticed any adverse effects from this type of behavior.