5 Easy Steps to Win the Credit Card Game

If you’re like me, you may be able to think back to a time when driving was a different experience than it is for you today. Maybe backing out of the driveway or merging onto the freeway got your heart rate up, knuckles white, and palms sweating. Or maybe you thought you were the “king of the road”, driving fast and furious until one day you pushed beyond your limits. Replacing worn tires, brakes, belts, and fluids was probably far from your concern.

Today you might have a more complete understanding of the responsibility that comes with driving and car ownership. You are probably more aware of your surroundings on the road, and more diligent to protect your investment (and your passengers) with safe driving habits and preventative maintenance.

Similar to driving, a credit card brings with it real risks and dangers, but, used responsibly, it can be an important tool to save money and build credit. When done right, using a credit card costs nothing and offers huge benefits, saving you thousands of dollars through both rewards on your spending today and lower interest rates for large purchases in the future.

Here are the 5 Easy Steps to Win the Credit Card Game:

  1. Don’t Carry a Balance; Auto-Pay your Bill in Full
  2. Avoid Paying Fees and Interest
  3. Choose a Card with the Best Rewards
  4. Build Your Credit (On Purpose)
  5. Go Forth and Prosper!

Credit card companies make money in three ways. The first is by charging merchants a fee (up to 5%) to process transactions. This fee is essentially built-in to prices for most of the things we buy, and it is the reason you may sometimes see “cash discount” prices at smaller merchants or the gas pump. The second way is by charging a (super-high) interest rate on balances. While the processing fee is mostly invisible and out of your control (it is already built-in to prices everywhere), carrying a balance is an avoidable direct cost to you. The last way is by charging you fees, such as an annual fee or cash advance fee. These are generally a bad deal and worth avoiding too.

Step 1: Don’t Carry a Balance; Auto-Pay your Bill in Full

One way to help avoid the possibility of carrying a balance is to set up auto-pay for all of your credit cards. All cards offer this option, so that the full amount of the bill will be automatically paid off each month. Don’t swipe your first transaction before you know that this is set up. This step eliminates the risk of late payment (which can damage your credit score, raise your interest rate, and reduce your eligibility for the best cards), and of course it also ensures you won’t be paying the credit card company any interest.

Does setting up auto-pay for your credit card sound scary? Are you worried that your credit card bill will overdraft your checking account? Having a credit card might not be the right choice for you right now. Risking late payment by manually paying your bills, and carrying a balance when you don’t have enough money for your purchases will quickly outweigh the benefits of building credit and getting rewards. Keep it simple with a debit card until you have stable footing to win the credit card game.

Step 2: Avoid Paying Fees and Interest

Since you’ve already set up your account with Auto-Pay, credit card interest is a thing of the past. The next step is to make sure you’re minimizing fees. This generally means getting rid of any cards with an annual fee, and also avoiding services like cash advances that carry an extra fee. Call your credit card provider and ask them to put you on their “do not solicit” list so they stop sending you “blank checks” for cash advances and other services that carry an extra fee. After all, you don’t use your credit card like an ATM, you use it like a debit card.

Step 3: Choose a Card with the Best Rewards

Once you have settled on automatically paying your full balance every month, the next step is to find the best card to maximize your benefits (rewards), while also remembering to minimize your costs (fees). There are many websites that can help you find the right card for you. Since you have already settled on paying your full balance each month, the cards that emphasize low interest rates, balance transfers, etc. will be less interesting to you. You want the best rewards, which at the time of this writing is probably something similar to the Fidelity Investment Rewards American Express, a 2% cash rewards card with no annual fee.

American Express charges the highest transaction fees, which means these cards often include the best rewards. However, many small businesses won’t accept AmEx due to the high fees, meaning you probably want to carry a Visa or MasterCard as well. In addition, you may find that some cards offer better rewards on certain categories of spending (e.g. Groceries or Gas). If you spend a lot on these buckets you may want a designated card to maximize your rewards.

Step 4: Build Your Credit (On Purpose)

You may not have enough credit to get one of the very best rewards cards at first, or even to get a credit card at all. If this is the case for you a “secured card” may be your first step. These cards are “secured” by a deposit of your money with the bank, and the amount deposited will become your credit limit. After using one of these cards for a few months, you will have enough credit to get a “real” credit card, ideally one with at least 1% rewards and no annual fee.

As you continue to build credit by paying your credit card bill on time, you can track your progress building your credit with a site like creditkarma.com or creditsesame.com. These sites offer free monthly updates on your progress, using information from the three credit reporting agencies: Equifax, Experian, and Transunion. These free services are funded by advertising, so it is worth taking their recommended credit cards for you with a grain of salt, but they offer valuable info on your credit score progress every month.

You may find you receive feedback that your credit utilization is too high. If you have a strong credit score and good history of on-time payment, but high utilization, you might consider asking your credit card provider for an increase in your credit line. Keep in mind that asking for more credit is a “hard inquiry” that will have a short term negative impact on your credit score, but in the long run having more credit on tap reduces your utilization and boosts your score. Credit providers generally prefer to lend to customers who don’t need a loan; this is because they want to be sure they’ll be paid back. Maximizing your credit score is a tightrope act to get as much credit as you can without looking like you’re trying too hard.

Step 5: Go Forth and Prosper

By using your credit card responsibly and automatically paying the full balance each month, using your credit card will save you money with rewards on the spending you would have done anyways, all while helping you build credit that will help you save even more money when you need financing for a large purchase down the road.

Take the time to look into the other benefits that your credit cards may provide. Many credit cards offer perks like extended warranties on the items you buy with the card, insurance for rental cars, free flights or hotel stays, airport lounge access, etc. Know your perks and use them!

Use Autopay: Get Rid of your Bills!

Here’s a quick and easy way to improve your life: stop paying your bills! Surely you’ve heard someone mention that life was so much simpler when they were a kid and didn’t have bills to pay!

Well, of course, your bills still have to get paid if you want to enjoy modern conveniences like electricity, running water, and the internet in the comfort of your own home. But, are you still mailing checks or manually paying your bills each month? I can’t imagine why you would bother to do this yourself when nearly every reoccurring bill there is these days can be paid automatically with bill pay.

Say your landlord doesn’t offer it? Payment amounts that are the same each month or known in advance can be set up through your bank’s bill pay service – many banks offer this service for free and can even mail a physical check each month for you at no extra charge.

Why go through the hassle of setting up auto-pay for each of your bills? The most obvious reason is that a little upfront setup will likely save you time in the long run, but there are some less obvious benefits too. It’s one less thing that will wind up on your (ever-growing) to-do list each month, so it just might help save you some stress down the line. Automating your payments also eliminates the risk of paying late, which can have negative impacts ranging from late fees to even damaging your credit score.

Of course, for many there’s some discomfort about knowing your bills will come out of your account without your go-ahead. If overdraft is a real risk, then you’ll need to address that first, but you may find it really does simplify your life to have bills getting paid on their own, leaving you to just manage your balance.

Already have all of your bills on auto-pay? Take the next step and go paperless! Each physical bill and statement that you bring into your home is just one more thing for you to process, sort, file, and dispose of. Save yourself the effort and physical clutter by going paperless and reviewing these online.

So, you may not really be able to get rid of your bills. But with Auto-Pay and Paperless statements you can manage your expenses on your own terms, without having them constantly barging in on your precious personal time and space. Take control and make your bills work for you!

What do you think – are you an auto-pay fanboy or are you a check-writing purist? Leave your thoughts in the comments.