In case you missed it, I recently added an “Ask Ali” feature to the blog! I would LOVE to answer your personal finance questions. No matter how big or small, if you’re wondering, chances are someone else is too!
Today I’ll share a question from a reader regarding credit cards. The reader asks: “I’m curious to know your opinion on having multiple credit cards to make the most of their respective cash back/reward offers.”
Luckily, I have LOTS of thoughts on the subject, so let’s dive in!
My personal credit card philosophy
Let me start by sharing how I personally handle credit cards. I like credit cards for a number of reasons. They offer a level of protection that debit cards don’t in the case of theft or fraudulent activity. They are easier to deal with than cash (I HATE fumbling with bills). They are widely accepted. They make it insanely easy to track spending (just link with Mint and DONE). And, last but certainly not least, they give you rewards. Now, I know that credit card rewards usually aren’t big. Typically, you’ll get 1% back at best. But that is still 1% more than I would get by using cash or debit.
Where credit card rewards get really interesting is with new card offers. You’ve probably gotten about 1,000 of these in the mail over the years, and if you’re not looking for a new card they can be very annoying. I’m not generally in the market for new cards, but I like to keep an eye out for that stray deal that is too good to pass up (like the one that earned me enough points to book all of our flights within Europe this summer).
Before signing up for a credit card offer, think through the questions below to make sure the card is a good fit.
Things to consider when thinking about opening a new credit card
- Do I trust myself with a(nother) credit card? For some people, credit is a dangerous thing. Available credit may seem like this pool of free money just waiting to be spent on unnecessary items. This can only lead to running up a balance and paying huge amounts in interest (rewards cards often have higher interest rates than other cards). If this is you, the rewards bonus won’t be worth the risk. There is just no way that you can make up for large interest payments with credit card rewards, especially when you consider that the average interest rate on a fixed-rate credit card is 13.02%!
If you do trust yourself not to spend more simply because you have credit available and are earning rewards, then go ahead and move on to question 2.
- Do I have a big upcoming purchase that will require great credit? If you’re planning to buy a home in the next few months, I’d stay away from opening a new credit card just for the rewards points. I’ll talk more about credit scores in the future, but they can be impacted by opening new cards. When you’re applying for a mortgage or other large loan, every little point on your credit score matters, so you don’t want to do anything to risk jeopardizing your good standing.
If you don’t have any major purchases coming up for which you’ll require a loan, think through questions 3, 4 and 5 before making a final decision about opening a new rewards credit card.
- What fees are associated with the card? I don’t like credit cards that charge a yearly fee. I just don’t see why I should have to pay for the privilege of spending my own money, and I never make use of the benefits enough to justify paying a fee. A lot of the time cards will waive the fee for the first year, in which case I might sign up but make sure to set a calendar reminder for myself 10 or 11 months later to cancel before the new yearly cycle begins.
One exception to this general rule is that some cards will offer HUGE sign on bonuses but not waive the fee. In this case, I look at the net benefit of the card (reward value less yearly fee) to determine if it is worthwhile. I’ve also found that some companies will refund a prorated portion of a yearly fee if you cancel within the year, so if you are able to get the card rewards quickly you may be able to avoid paying the entire yearly fee.
- Will my regular spending be enough to reach the rewards threshold? A lot of card offers read something like this: “Earn $100 worth of rewards points when you spend $500 in the first 3 months.” If your regular expenses have you putting $500 on a credit card every 3 months, great. Put all of your expense on the new card until you’ve hit the spending threshold and you’re good to go. A lot of the time, these spending limits are quite high, so be careful not to buy things you wouldn’t ordinarily buy and/or don’t need just to meet the spending threshold.
A tip here is to time opening a new rewards credit card with a big purchase. Need to buy a new fridge? Open a card and put the fridge on that (assuming you can afford to pay off the card at the end of the statement period). Oftentimes rewards card offers have a big window in which you can apply, so you can hang on to an offer until you know you have a big expense.
- Are the rewards really useable? Generally I think the answer to this is “yes,” but it is worth thinking through what the real value of the rewards is. If you’re getting cash back, perfect. Cash is king. Points can be good also, especially if you can use them towards gift cards, for which you often get a more favorable points-to-dollar value exchange rate. I haven’t really mastered the world of airline rewards points yet, as I find that they typically have so many blackouts and lack availability as to become virtually unusable.
Managing rewards credit cards: How many should I have at any given time?
If you’ve gone through the steps above and opened a rewards credit card or two, you may find yourself with a few more cards in your wallet than you really need. I hate to have an over-crowded wallet, and I also hate having to think through “oh when was the last time I used this card, I better charge this to this card,” etc. I already have to do a little bit of this to satisfy requirements at my credit union (more on that in the future), so I just don’t want to deal with it for credit cards.
With this in mind, I typically cancel new cards after I’ve received (and spent) the rewards bonus. I’m somehow very wary that if I cancel the card before cashing out the rewards, they’ll go away. I have no idea if this is true, but to play it safe I make sure to have gift cards/cash/whatever in hand before cancelling a card.
The exception here is if I find a card that I really love. For example, I have a Chase Sapphire card that I originally opened for the rewards bonus but have kept because it has no yearly fee, is a Visa and is therefore accepted everywhere, and has great rewards options.
Another note: canceling new cards is fine but don’t go cleaning out your wallet and cancel your oldest card. Length of credit history impacts your credit score, so hang on to that old card even if you never use it.
I usually have about 4 to 7 credit cards in my wallet. Some have specific uses (like my joint credit card with BF or Macy’s card which I only use for discounts there) and some don’t. Some people like to carry one card that offers the best dining rewards, one that offers the best gas rewards, etc. I find that too complicated and tedious. The cards I keep are the ones that offer consistent rewards on all categories. I also find that if you spread spending across many cards it will take a long time to accumulate any real point value on any one card. For that reason I try to concentrate spending on one card to accumulate meaningful points in one place.
Do you open rewards credit cards for the bonus points? How many credit cards do you have in your wallet?