Why your credit cards may deserve a second chance
While paying off $1,700 in credit card debt in 2014, Jamie Griffin cut up his card. To tackle the remaining $90,000 in student loans he and his wife carried, he read personal finance experts’ tips and turned to cash and a spreadsheet to budget. Now that most of their debt is paid off, he’s giving credit cards a cautious second chance.
Griffin has come to see credit cards as a way that he and his wife, Jenna, who are both teachers, can potentially defray the costs of travel. Instead of immediately applying for a travel credit card, though, the 31-year-old from Duluth, Minnesota, let his wife’s longtime rewards credit card lead the way as they transitioned from using cash to credit for most purchases.
“We wanted to practice to make sure we could actually do it rather than reverting back to our old spending habits of just swiping a card because we could,” Jamie Griffin says. “We haven’t had to pay any interest. We haven’t had any late payments.”
If you, too, have developed new spending habits — and potentially higher credit scores — since paying off debt, you might be a good fit for rewards credit cards that earn cash back for your emergency fund or miles for a vacation. Here are factors to consider:
Rewards can help with expenses
Rewards credit cards generally require a credit score of 690 or higher. They can earn cash back, points or airline miles in specific categories or on everyday spending. Rewards rates vary by card and some also offer sign-up bonuses with introductory zero-percent interest rates for new cardholders.
Depending on the card, rewards can be redeemed for things like cash, statement credit, travel, gift cards or merchandise — all of which can help with household expenses, as long as you pay credit card bills in full every month to avoid interest charges.
Since early 2017, the Griffins have collected 38,000 points — that’s over $300 in cash back. They redeemed 20,000 points (about $200) into their bank account earlier this summer.
Your credit may depend on it
Paying off debt is a worthy goal. But if you later stop using a credit card, it can hurt your credit scores. That’s because credit utilization and length of credit history are key factors in the calculation of those scores, according to FICO.
Say you were to close an older high-limit credit card after paying it off — or that you use the card so infrequently that the issuer ends up closing the account for you. Shutting down the account would not only decrease your amount of total available credit; you would also lose the card’s account history.
Another factor in your credit scores is credit mix — the combination of different kinds of credit accounts. A healthy credit mix might include a mortgage or car loans, for example, and also credit cards.
“If you have a healthy mix of credit, and you’re using them wisely, and you have a good history, that should reflect in your credit score,” says Jeffrey Arevalo, financial wellness expert at GreenPath, a credit counseling agency.
Of course, without piles of cash on hand, you’ll need good credit if you want to qualify for a home or car loan at the lowest interest rates. Keeping a credit card active and using it responsibly is an easy way to maintain good credit.
But if the temptation to overspend is too great, closing a credit card account may be the way to go, Arevalo says.
Credit cards can help you plan
Before moving most of their expenses to credit, Jenna Griffin asked the issuer about benefits for longtime customers. The couple secured a six-month safety net with a zero percent interest rate that they didn’t have to use.
Recently, the couple was approved for a credit card that earns miles to help them save money on travel expenses. Jamie Griffin continues tracking all of their expenses on his spreadsheet.
If you’re ready to give credit cards a second chance, here’s how to use a rewards credit card and maintain good credit:
■Pay your bill in full and on time every month.
■Don’t stray from your budget just to earn credit card rewards.
■Keep charges below 30 percent of your available credit.
■Use your credit card as a budgeting tool to track your spending and review your purchases.
■Keep your no-annual-fee accounts open and active to avoid hurting your credit score.
NerdWallet: How to choose a rewards credit card, nerd.me/choose-rewards-credit-card
■5 factors that determine a FICO score, blog.myfico.com/5-factors-determine-fico-score/
■What is a credit utilization rate? experian.com/blogs/ask-experian/credit-education/score-basics/credit-utilization-rate/