Life Kit - Boost Your Credit Card IQ

Episode Date: April 29, 2019

If you use credit cards in a intentional way, you can free up some valuable perks. We geek out on strategies to make credit cards work for you, without getting out of control on spending. Here's what to remember:- Use credit cards that have the best rewards on the things you spend the most money on.- Protect your credit score: Always pay off your balance, don't spend more than 30 percent of your limit, don't cancel a card you've had for a long time.- Don't outgame yourself by accepting too many new cards with sign-up bonuses.- Know yourself: If you've had trouble with running up debt, don't tempt yourself with more cards.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

What's in store for the music, TV, and film industries for 2025? We don't know, but we're making some fun, bold predictions for the new year. Listen now to the Pop Culture Happy Hour podcast from NPR. Hi, NPR. This is Pamela Benjamin from Miami Beach, Florida. We're going to be discussing our credit card reward strategies. Credit cards. You know, sure, they're risky. You can get in over your head. But if you know just a few smart approaches how to pick the right cards, you can get way more cash back, free airline tickets. One of my favorite trips is when we went to Greece and

Italy for my 30th birthday. What's your favorite for Benjamin? I would have to be this last spring when we went to Berlin, Prague and Vienna, also on miles. And you know why it was my favorite? Why? We got engaged on that trip. Yay! This is the dream. Free trips around the world with people you love. Who wouldn't want that? I want that. I'm Chris Arnold, and this is your NPR Life Kit guide for finding money that you didn't know that you had. This episode, boosting your credit card IQ. So whether you're looking to just figure out how to get a lot more cash back to put in your pocket or find good travel deals, we're going to learn how right after this. Thank you. Make America

affordable again. Listen to The Indicator, the daily economics podcast from NPR. One day in college, I was coming up out of the dining hall and there was this woman at a table. I still remember this. It was like this blue tablecloth and a little poster and some credit card applications. And she said something like, you should get a credit card. And I was like, okay, I guess today is the day I'm getting a credit card. And that is all the thought that I put into it. And 25 years later, I still have that same credit card in my wallet, or at least same credit card account.

And it gives me like 1% back. I use it to get airline tickets or whatever I want, which is fine. But I'm realizing now that all of the cards in my wallet, it's a similar sort of random bunch of credit cards without any strategy behind them. And I could be doing a lot better. I also made this mistake before I started working at NerdWallet. This is Kimberly Palmer. She's a writer with NerdWallet.

It's a personal finance website. And from the name, you can probably tell that working there means that she is like 10 miles deep in how to play the credit card game the right way. I actually had one credit card I used like you. It was the one I had in college. I just never changed it. And the first big takeaway from Kimberly is to not do what both of us did at first, but to actively seek out and to find the cards that are going to give you the most back. I mean, I feel like I'm an evangelist for using cashback cards because I think most people, my friends, my family,

I convinced my mom to switch her card. They don't realize how much money they're just leaving on the table by not using a card that gives them higher rewards. You can easily earn hundreds or even thousands of dollars a year just by using the right credit card. Hundreds or thousands of dollars of free money that most people don't get. We're about to learn how to get it. But first, this disclaimer, because, you know, we care about you guys. Credit cards tend to obviously famously infamously have like ridiculously high interest rates.

So if you can't pay off the balance, it's like, OK, everything else, all bets are off. Forget about the points. Get out of credit card debt. Is that sort of like the big headline here? Exactly. Because credit cards come with really high interest rates. And so you don't want to be paying 17, 18% or more on your purchases. So that's why if you're carrying any debt, you really just want to focus on paying off that credit card debt before you even think at all

about rewards. And look, it really is no joke, right? I mean, getting mired in credit card debt can have a terrible impact on your life, both financially and emotionally too. And if you do have credit card debt, we've got a whole bunch of Life Kit episodes actually that can help you. We've got one on budgeting that goes way into that and how to be much more intentional about spending your money. We've got one on how to avoid fees and an entire guide that's just about getting out of debt, debt reduction strategies. So check those out. All right. We already have our first takeaway, be intentional about which cards you have in your wallet. And to take that one step further, to do this the first takeaway, be intentional about which cards you have in your wallet.

And to take that one step further, to do this the right way, you need to think about what are a couple of the things that you spend the most money on. Some of you have this figured out. Brittany from Atlanta, she left us a message about her strategy. The biggest way that I take advantage of the different rewards programs for my credit cards is to make sure that I am using each credit card for a very specific purpose. So I have a specific card that I use for gas, for groceries, for my miscellaneous spending, for travel, for dining. So I use cards that give me the most points for my purchases. Let's just look at two of those examples, gas and groceries. A lot of us spend a lot of money there.

And it turns out that those are things that certain cards will give you way more cash back on. So compared to the 1% back that many cards offer. You might be able to find a card that gives you 2% or 3% back on all of your gas purchases. For groceries, it's actually you can find 6% back on your groceries. And so by using those cards when you're making those purchases, it can really help you stretch your budget. And what's like the number of cards that you recommend? I mean, I guess, look, you could go crazy and be like, okay, I've got a card for dining and gas and groceries. And when I go to the veterinarian, I mean, like, like,

what's like the right number of cards for people to kind of split up into these categories? I think three is a really good number. Because if you have three credit cards, you can have one card, that's your everyday cashback card, where you're earning a high rate, a relatively high rate for your gas and your groceries. You also often want to have a travel card if you're someone who is a frequent traveler. And then the third card for people to consider is a store card. If you frequently shop at one particular store, so for example, at Target or Amazon, if you use their store cards, you can often get 5% back on all of your purchases. And so it's something to consider if you are spending a lot of money at a particular store. And when you're shopping around for those three kinds of

cards, there are some good websites out there that search out the best cards and deals for you, and you can compare them. NerdWallet does this. Consumer Reports. Yes, it's important to make sure that what you're reading is up to date because cards actually change constantly. The offers, the interest rates, all of that is in constant flux. And so you want to make sure you have the most up to date information. Of those three types of cards that Kimberly talked about, the travel card, at least for me and probably for most people, I mean, this is like the enticing holy grail of the credit card game. Like the couple Pamela and Benjamin getting engaged in Europe, being super happy, flying for free. And we heard from some people where this is a huge passion for them. This one guy in particular stood out, Brandon Chase. Yeah. So I myself have 35 credit cards and my

girlfriend has 15. And so Brandon is like a world champion of playing this credit card game to pile up massive amounts of miles almost for free. And Brandon's technique is probably not recommended for most people. He's got 12 very complicated spreadsheets to keep track of bonus offers. And when he's got to cancel a card to avoid a fee, and then he's got to spend $3,000 on this card before he gets the free miles. And there's all this other stuff. And I mean, I would never be able to pull this off. But Brandon and his girlfriend spent a month recently traveling all

over the world, staying at fancy hotels and sometimes flying first class. Like, for example, we had a first class flight from Singapore to Paris on Singapore Airlines, which is far and away like the top airline in the world. So we were in first class and they brought us some crew champagne and you have these lay flat beds and we were right next to each other and they could put them together and then close these doors on the side. So we had an enclosed full side bed while we were flying from Singapore to Paris and drinking Krug champagne. And we're like, this is incredible. And we paid $200 for it. That would have cost us $14,000 if we had paid for it.

But we used all miles and paid a couple hundred dollars out of pocket for the fees. I mean, that's amazing. Most people do not want to spend the time that he's spending managing so many credit cards. I mean, if you talk to most people, they can hardly remember to pay their statement every month and take the time to review it. I mean, managing your credit cards takes time and energy. Okay, so most people are not Brandon. I'm not Brandon. Don't even try to be Brandon. But Kimberly says a good takeaway for the rest of us here is that if you get one of these offers in the mail for a really huge pile of miles, like 50 or 75,000 miles, or

I got an offer for 100,000 miles the other day. It's not crazy to take that offer and get a free trip to Puerto Rico or something and then cancel the card later so you don't get stuck paying an annual fee or having too many cards. And you don't have to be some kind of spreadsheet genius to pull that off. I did that once and got a free trip and it was super cool. Of course, though, with all of these things, you got to read the fine print. Sign up bonuses are generous and noticing which one might work for you and just making sure you will actually take advantage of it and use it. Using those sign up bonuses, you usually have to finish a certain amount of spending within a time limit.

You might have to spend $3,000 within the first three months of opening the card in order to earn the signup bonus. So you just want to make sure you read that fine print so you'll actually earn that signup bonus. And don't outgame yourself. Call this big takeaway number three. Some people are disturbingly good at this signup bonus game. It's true. But don't get in over your head and think about it this way. This is a game where you are one person. And so it's your brain against big banks and lots of computers. And if you make it too complicated, you start juggling too many credit card offers, you are just much more likely to screw this up, get hit with a bunch of fees and lose than if you keep it simple. One way people do this to make it easier for them is to set up automatic payments on their account. So the bill pays automatically every month

and they don't have to remember it. Of course, you have to make sure you have enough money in your bank account for that payment to go through. But even keeping it simple, you can still earn significant rewards. All right, so having three cards for different stuff, getting a card for the miles and canceling it, how is all this going to affect our credit score?

Lenders want to see that you know how to use credit responsibly. That's what a credit score is all about. It's trying to put a number on that. And that number or credit score, it's, of course, this important gatekeeper number that if it's bad, it can stop you from buying a house. It can become this scarlet letter that gets in your way in all kinds of different ways. I mean, even finding a job sometimes, employers can pull your credit report. So now this is our next big thing

that it's good to know about credit cards because of all this stuff. How can you use them to help and not hurt your credit score? So one thing, it's pretty obvious, you gotta make those payments every month and not be late on the card. This next thing though, not so obvious.

You typically wanna make sure for you that your credit limit is well above the amount that you plan to spend on the card each month. And that's because you wanna keep the total use of your card under that 30% number just to protect your credit score. So that means that you wanna have a credit limit that's more than three times higher

than what you ever plan to spend on that card. Exactly. So the way the credit agencies look at that is that the person is getting so close to their credit limit, they're about to hit it. I mean, what's going on there? It is something that raises a red flag. And so they want to see that the consumer is always spending about 30% or less. Something else that might be a little bit counterintuitive is that sometimes it's totally okay to close a credit card account, but other times it can actually hurt your credit score. Because if you close your credit card, it does a few things. One is it lowers your overall credit availability because it's eliminating that credit limit

from what you have access to. The other thing it does is that it takes off that card from your credit report. And if you've had that card for a long time, it can actually be helping your credit score because it shows a long standing account. And so it's definitely something to think about before you close a card, especially if you're close to taking out a big loan, like a mortgage or an auto loan. I see. So the creditors are looking at it like, oh, look, you know, Kimberly's had this card for 15 years and she's always paid it off. And wow, that looks pretty good. Whereas if you cancel the card, they can't see that anymore. Exactly. It goes off of your credit report

and they don't have that information. So the key thing here is the age of the card that you want to close. A card you opened six months ago just to get some free airplane miles, you can cancel that no problem. But a card you've had for 10 years, you probably want to hang on to that. And here's another good tip. I actually had no idea about this one and it's really good. You can call your credit card issuer and get them to swap out an old lame card with one that does more for you. So, all right, let's say you've had a card for 10 years and maybe they stuck an annual fee on it now and you really don't want the card, but you also don't want to cancel because of that credit history thing. So what you do is

you call up and you say, I want to upgrade the card and you trade the old one for this new card, but you get to keep the credit history. And then there are the people who never got that card 10 years ago or in college or ever. I mean, they still don't have a card. Can you guys hear me? Yeah. Yeah. Our producer Sylvie is one of them. We actually didn't know this about Sylvie, but she chimed in during our conversation with Kimberly. I'm a little cynical about this whole thing because I don't have a credit card yet. And like, I really don't like the idea that I start off with no credit as I need to establish credit.

And so I think I put it off. And was it a little bit like, you know, oh, I don't need this whole banking system and their capitalism stuff. And like, I just, just yeah it was kind of like that i think like my cynicism was coming through and i just you know uh yeah but now i think you know having credit is important for things i want to do like applying for apartments and stuff can i ask one question yeah um how are you paying for things? Debit card. Okay, so this is actually exactly what my husband was doing until I reformed him on credit cards.

The problem with using debit cards all of the time for your everyday spending is that you're putting so much of your money, your bank account, at risk. Because if your credit card is lost or stolen, you can immediately freeze that credit card. You have full fraud protection from your card issuer. But if your debit card gets lost or stolen, then it is entirely possible for someone to empty out your bank account before you even realize that happens. And yes, eventually you would probably get that money back. But in the meantime, you're probably late on bills, unable to make payments. It can cause so many more problems for people. So that's a good takeaway, too. If your ATM card gets stolen, much bigger problem than if your credit card gets stolen. Sylvie had another surprise for us.

While she was doing research on this episode, she decided to get what's called a secured credit card, which basically you put down, say, a $500 deposit, and then you get a credit card with a $500 limit, and you can use that to establish your credit history. So I applied for a secure credit card and was approved. And so I have a credit card in the mail, my first one. So credit cards, using them right, they can help you in a bunch of ways. But this is just like a big picture gut check kind of moment here to really think about yourself and your habits. Maybe look in the mirror because research by behavioral economists has found that some people are just much more predisposed to overspend and get into trouble with credit cards. That has something to do with the big gap in time between the joy of spending and the pain of paying the bill a month

later or not paying it. So if you know that you've just always had trouble running up lots of credit card debt, then the points and the rewards, all this stuff, it's just probably a game that you don't want to be playing. Credit cards are not for everyone. I mean, for a lot of people, they're an amazing tool that give you flexibility and fraud protection and these amazing rewards. But some people, they just know from experience that using a credit card for their everyday spending will actually cause them to spend more than if they used cash. And I mean, that's a real thing to consider. And you don't want to be enticed into spending more than you can afford, more than your budget will let you spend comfortably. And so for some people,

it is better to stick with other ways of paying for things just to make sure they're not overspending. All right, so if we do what we just learned about, we can have a nice roll of extra $100 bills in our packets at the end of the year. In an added bonus, maybe your credit score gets a little better out of all this, and you might get a free airplane ticket somewhere, which would be super fun and cool. So to remember the most important points, here's Kimberly with the takeaways. Tip number one. You really want to be intentional and make sure you have cards that are giving you the best rewards, which depends on how you spend your money. Kimberly says a good way to go here is to have three cards, one with good rewards for everyday stuff like gas and groceries, and then one that's good for travel, and then one for a specific store if you shop at one frequently. Okay, tip number two. You also want to use credit

cards in a way that helps your credit score and doesn't hurt your credit score. One big thing that means is not going above 30% of your available credit. And you also don't want to cancel a card, especially if you've had it for a long time. Tip number three, it might be tempting, but you want to make sure you don't out game yourself. So that means that yes, you can get crazy amounts of miles for free flights, but you do want to be careful. And tip number four, you want to make sure you know yourself because some people are more likely than others to get into trouble with credit card debt to overspend. So if you're someone that has struggled with that, then you want to make sure you play it safe. Maybe just use one card with a relatively low limit on it.

And you can also stick with cash if that's a way to help you stay on top of your budget. For more Life Kit, go to npr.org slash Life Kit. And while you're there, subscribe to our newsletter so you don't miss anything. We've got more guides coming out every month on all sorts of topics. Also, check out the Your Money and Your Life Facebook group. There are lots of people and there are thousands of people helping each other out with personal finance. And here, as always, is a completely random tip, this time from NPR reporter Kat Chow. Always travel with one of those sleep eye masks. It's especially awesome if you're in a hotel room that's bright or on a train or an airplane where, you know, you just need some extra help falling asleep. It forces your eyes shut and kind of signals to people to not bother you. And if you're in a meeting and it gets boring, you just pull it down off your forehead. That works too. If you've got a good tip and you want to suggest a topic, email us

at lifekit at npr.org. I'm Chris Arnold. Thanks for listening. If you like this podcast, try Planet Money. We try to understand human behavior by understanding how money moves in the world around us. Money is power, and listening to Planet Money will make you more powerful. Maybe. Subscribe to Planet Money.