Judging from our inbox, there seems to be a lot of credit confusion out there.
You’ve got questions: How many credit cards should you carry? When should Junior get his own card?
Luckily for you, we’ve got answers.
1. How many credit cards should I have?
That depends on whom you ask — and what your financial situation is.
Some financial gurus would tell you the answer is none. Meanwhile, other card experts say you can have a lot more.
Adam Levin, co-founder of our partner site Credit.com, suggests a more middle-of-the-road approach that involves a rewards credit card for everyday use and a low-interest card for emergencies.
Having one all-purpose card is fine as long as you’re paying off your balance each month. But rewards cards tend to have higher interest rates.
When the water heater says “No more” and your bank account says “Yeah, right,” you might want to use a low-interest credit card if you don’t have an emergency fund. You don’t want to carry a balance on a high-interest rewards card.
Still unsure which card is best for you? Looking for a new or better card? Explore the Money Talks News Solutions Center, where you can search various credit cards based on multiple types of rewards and rates.
2. Should I carry a balance?
Unless you must self-finance a purchase or are dealing with an emergency, paying credit card interest is just plain dumb.
Some people believe you need to carry a balance for your credit score to benefit, but as you’ll see in No. 3, that’s not really the case.
3. How is my credit score calculated?
While several companies create credit scores, the ones most likely to influence your access to credit and the interest rates that lenders charge you are your FICO Scores, particularly the one known as FICO Score 8.
The main FICO Scores range from 300 to 850. The higher the score, the more trustworthy you appear to creditors.
These FICO Scores are weighted based on your:
- Payment history: 35 percent
- Amounts owed: 30 percent
- Credit history length: 15 percent
- New credit: 10 percent
- Mix of credit types: 10 percent
For more information, check out “8 Credit Score Myths: Fact vs. Fiction.”
4. How often should I check my credit score?
Credit.com’s Levin suggests looking at your credit score frequently. It’s easy to do, without paying. Start here:
Once you get a look at that magic number, you may want to take this advice on how to raise your score quickly.
5. I’m ready to ditch my debt. Do I pay off the card with higher interest or a higher balance first?
The answer to this question also rests largely on which financial guru you ask.
Some argue you should start with the smallest balance, only because quickly paying off an account can give you the momentum needed to stick to your debt diet.
However, from a purely financial standpoint, it is better to start with the highest-interest card. Paying off the high-interest card first will save you money on interest payments. Or as Levin puts it:
“The faster you get the high interest rate down, the more of your dollar actually goes to pay the low-interest balance.”
6. Should I co-sign a card for a friend or family member?
Co-signing for a card or loan puts you on the hook for the balance if the friend or family member stops paying. If the borrower makes late payments — which you may never know — it could also negatively affect your credit score.
You may protest: “But I know that wouldn’t happen. They are really good people!”
Sometimes even good people make poor money decisions, or life takes a turn they didn’t expect.
Bottom line: You shouldn’t co-sign unless you’re ready and able to assume the debt as your own in the event your co-signer — for whatever reason — can’t pay.
7. When should my child get her or his first credit card?
Probably not until he or she has a real job and some emergency savings.
Children must have their own money before they start using someone else’s cash, so a steady job is a must. A work-study gig in the campus cafeteria for three months doesn’t cut it either.
Emergency savings help ensure that your child doesn’t get sucked into using a credit card for every minor crisis or shopping whim. Students need to get into the habit of saving before they focus on the habit of spending.
Educate your children on smart credit habits, hope it sinks in and refuse to co-sign any applications for them.
8. Should I close the account on a credit card I no longer use?
If you are concerned about your credit score, Money Talks News founder Stacy Johnson suggests it may be best to keep the credit card account open.
You also may be interested to hear what FICO says on the subject:
“We never recommend closing a credit card for the sole purpose of raising your FICO score.”
9. Is it ever smart to pay an annual fee?
For most people, the answer is no, although you may need to do a little math to figure out what’s best for you.
As you’ll see if you try Money Talks News’ credit card search tool, there are plenty of great credit cards that are fee-free. That means typical cardholders probably shouldn’t be paying for the privilege of charging their purchases.
However, if you’re a heavy user, it may make sense to splurge on a card with a fee. A few years back, I interviewed a frequent flier who told me he happily paid around $400 annually for his premier airline card. It was money well-spent because it included a sky club membership valued at around $700 per year.
He would have bought that membership anyway, which meant he was saving money before he spent a single cent on the card.
Look at the rewards you earn versus the annual fee and see if the card pays off. Be realistic, though. Don’t calculate in the value of perks you’ll never use when deciding if the annual fee is worthwhile.
10. I made mistakes and destroyed my good credit. Should I get a credit card to rebuild it?
If you’ve ruined your credit, you need to do a little soul-searching before filling out a card application.
Yes, using a card responsibly may help you improve your credit. At the same time, it could just dig you a deeper hole if having plastic makes you lose all spending self-discipline.
A secured credit card is one way to test the waters, and there are ways to build your credit score without a credit card.
Have additional intel to share about credit and credit cards? Do so in comments below or on our Facebook page.
Marilyn Lewis contributed to this post.