A Closer Look at Credit Cards
Befuddled by the best plastic practices—not to mention all that fine print? In plain English, here’s everything you need to know.
Fact: Before the recession began in 2007, that may have been true. But since then issuers have been closing accounts and cutting limits, even on customers with good credit histories, says Linda Sherry, a spokesperson for Consumer Action, a San Francisco–based watchdog group.
As a result, you need at least two credit cards (excluding store cards), since you may never know when an issuer will slash your limit or close your account, says Gerri Detweiler, a personal-finance adviser for Credit.com, an independent education website. Also, the average limit on a new card is now just $3,972, down from $4,897 in 2008, according to Equifax, and at times you may need to make larger charges.
Your main card should be a rewards card, ideally a no-fee cash-back version, which will give you a rebate of up to 5 percent on everyday purchases, from gas to groceries. (See The Top-Five Rewards Cards for great card suggestions.)
The second card should be a backup, to be used primarily for emergency expenses, says Detweiler—for example, your refrigerator dies and you need a new one right away. Make sure the card has a low interest rate (look for an annual percentage rate, or APR, in the midteens, ideally lower than 12 percent) and a high limit, such as $5,000 or more. Then remember to use the backup card occasionally—for a tank of gas or a dinner out—since you could lose the account if your card is inactive. “You won’t have an established history with the issuer, so they may view you as a liability, since you have all this outstanding credit that you could tap into suddenly,” says Barry Paperno, a consumer-operations manager for MyFICO.com, the consumer division of the credit-score company FICO.
If you already have more than two cards, as lots of people do, don’t rush to close the extra accounts. Keep them, as long as you’re using them responsibly—meaning, you pay the balance every month and maintain a credit-utilization ratio under 10 percent. But if you have problems keeping on top of all of them—you don’t always pay your bills on time and often carry a balance on multiple cards—then you might want to reduce the number you’re carrying to two.