It’s hard to hear the phrase “personal finance expert” on late-night television without cringing at the thought of what comes next. At times, you’ll hear three of the same, warmed-over chestnuts about how to manage your credit cards to boost your personal credit. Yet in the past few months, drastic changes in the banking industry have forced credit card issuers to rip up their playbooks and start fresh. Rethinking these three ideas can help you ride out the rest of the recession:
Old Rule #1: Avoid Using Credit Cards
It’s fun to watch a television talk show host rip a credit card in half with a buzz saw. Aside from pure entertainment value, there’s no good reason right now to cut up your cards. Getting the bast rates on home mortgages and on car insurance policies can require a high credit score, and you can’t do that without at least one stable credit card account on your profile. You can still live debt-free and enjoy the benefits of credit cards, like cash back rewards and extended warranties, just by paying your bill in full each month.
Old Rule #2: Use Only 30% of Your Available Credit
“Credit utilization rate” was the banking industry’s best kept secret until a few years ago, when clever credit experts realized that keeping your balances at about 30% of their available credit lines was the key to a higher credit score. However, recent regulatory moves require banks to keep more cash on hand. If you want to appear financially sound to your bank, use only about ten percent of your available credit, across every one of your active cards.
Old Rule #3: Use Credit Cards for Emergencies Only
The Credit CARD Act took a huge chunk of profit potential away from bankers. Therefore, it’s not surprising to see inactivity fees creep up on dormant accounts. Use a formerly “emergency-only” card to handle routine expenses, such as gas tank fill-ups or wireless phone bills. You’ll avoid unexpected charges and you can even earn some special rewards. If you’re used to carrying a debit card or cash to pay for everyday expenses like dining out, consider using one of your credit cards instead. You can automate paying your bill with online banking tools, while leaving a receipt trail that makes it easier to track your spending habits.