This holiday season, Americans will spend an average $682 on gifts, decorations and food, according to the National Retail Federation. Many of them will put those purchases on plastic.
With budgets still tight, the question is: How do you use those credit cards smartly? Should you put all purchases on one credit card – or spread them over several cards? Should you finally open that retail card and get the 10% or 15% discount, but risk a hit to your credit score? Or should you shun credit altogether and use your bank’s debit card?
The answers, of course, will vary, depending on your financial profile and goals. What works best for those planning to apply for credit in the near future might not be the smartest thing to do if your priority is digging out of debt. Yet a different strategy may work well if you’re simply interested in collecting the largest number of rewards points possible.
Below are five smart card strategies for the most common consumer credit personalities. Happy shopping.
1. The credit improver
Profile: You plan to apply for a loan in the near future, so you’re working hard on improving your credit score.
Strategy: Unless you already carry balances on multiple credit cards, put all purchases on a single card — preferably the one with the highest credit limit. You may consider spreading your purchases across several cards if they already have balances, but pick the ones with the highest credit limits.
Why: Common sense may tell you to spread out purchases across several credit cards to keep each card’s utilization ratio (the proportion of your balance to credit limit) low. That helps your credit score, right? Not necessarily. Using multiple credit cards may actually hurt your credit score if you are starting with a $0 balance on any of the cards, says John Ulzheimer, the president of consumer education for Credit.com, an advocacy group. Part of the credit-score formula measures how many accounts you have with balances: The fewer, the better. (The effect is temporary, however: Your score will bounce back right after you pay those balances down to $0.)
Picking the card with the highest limit will keep your utilization ratios low. If you revolve balances from month to month, be mindful of the interest rate, as well. (For more on credit revolvers, see the next tip.) And be sure to pay your bills in time. Nothing can ding your credit like a late payment.
2. Digging out of debt
Profile: You are working hard on paying off your credit cards.
Strategy: If you think you can pay off most or all of your holiday purchases within a short period of time, pick the credit card with the lowest APR and most available credit.
Why: Your goal is to add as little as possible to your debt while preserving your credit score. A drop in your score might just be the excuse your credit-card companies need to raise your rates or lower your credit limits.
“It’s largely about making the right economic choice with the card,” says Samir Kothari, cofounder of BillShrink.com, a credit-card comparison web site. Use this calculator to see how long it will take you to pay off your debt – and how much interest you’ll pay along the way.
If your cards are already nearly maxed out, consider using a debit card. Keep an eye on your checking account balance to avoid overdraft fees and be sure to sign for purchases rather than punching in your PIN. Signature transactions go through the Visa (V: 81.79, +1.17, +1.45%) and MasterCard (MA: 239.84, +2.19, +0.92%) networks and you get benefits that like $0 liability for fraudulent transactions and purchase protection. (These perks are available on most credit cards.)