10 Rules Of Credit Cards?

I was looking at some other personal finance web sites when I came across Gary Fehdrau’s Stopping You web site. The site purports to “help people get through things that stop them from achieving their wants, desires, goals, dreams, and just living the life that they want.”

His Rules

In his blog, he has recently offered his “10 Rules Of Credit Cards” I would like critically review his rules for you:

Rule 1: Never Ever Close A Credit Card

I find this to be highly dubious advice. A credit card is a relationship with a company, not a life long commitment. While it is true that having a longer relationship with your credit card issuer is better for your credit score, there is no reason to hang on to a credit card that you have had for years and never use. At a certain point, the terms may change, or you may find another credit card that better meets your needs This may be in the form of a better reward, better terms, or a lower interest rate.

Rule 2: Keep Balance Below 1/3 Of Your Credit Limit

I can’t argue with this advice. For years, I had kept fewer credit cards thinking that was good for my credit score. Since I always paid off my balance in full every month, I thought my credit should be excellent. Sadly, in the age of credit scoring, merely paying off your balance in full and on time is not enough to ensure the best score. Credit agencies will raise your score if your balance is below 1/3d of your credit limit, so having far more credit than you need helps you.

Rule 3: No Annual Fees Allowed

I am going to have to disagree with this statement as well. While no one likes paying an annual fee, there are several situations where the fee is worth it. I spend tens of thousands of dollars a year on my Starwood American Express Card, earning rewards worth hundreds of dollars a year. This card easily earns it’s $45 annual fee. Other examples include various Delta SkyMiles cards that include valuable companion tickets, expensive business lounge memberships, and precious elite qualifying miles. While it is true that I wouldn’t pay an annual fee for a non-rewards card, people who know how to maximize their rewards will find many cards that are worth the fee. To be fair, Gary says that some cards are worth the fee, but they are rare.

Rule 4: Regularly Call To Get Rates Lowered

Can’t argue there. It never hurts to ask. I have never done it since I never pay interest.

Rule 5: Try To Pay Off Your Credit Cards Every Month

These are words to live by, however, as Yoda says, “Do or Do Not; There is no Try.”

Rule 6: Only Carry One Credit Card With You, But Have More At Home

I am going to have to disagree with Gary on this one. First, if having multiple cards in your wallet makes it too tempting for you to overspend, maybe you shouldn’t even have a credit card to begin with. Keep your money in your piggy bank instead. Second, my primary card is an American Express, however not everyone takes Amex, so a Visa or Mastercard is essential. Finally, I want to have additional cards with me in case one is lost, or is compromised by fraud. Also, in the rare event I use up all of my available credit, I don’t want to be charged an “over the limit fee” or be declined. Gary allows a lot of exceptions for this rule, and I think he should reconsider the entire premise of this rule.

Rule 7: Stay Away From Store Cards

This is mostly good advice. The exception would be if you are purchasing a large amount from a single store, and the reward is good. If I was ing a $4,000 big screen tv, and I was offered 10% off, I would get the store card. If a store card offered a large reward, and it was at store I would have shopped at anyway, such as my local grocery store, I might also consider it.

Rule 8: Use Rewards To Pay Off Card

This would be good advice, however it assumes that you are not managing your credit cards well. If you are paying off a credit card balance, you shouldn’t even have a reward card as they have higher interest rates than non-reward cards. It is hard to imagine a situation where the 1-2% cash back is somehow the difference between paying the balance off in full and carrying a balance. If you are living on such a razor thin edge, you probably have bigger problems than what to do with your reward.

Rule 9: Don’t Use To pay For Basic Survival

It is hard to agree with this rule, because I always pay for everything on my credit card. I rarely ever have cash in my wallet. On the other hand, Greg makes an exception for people who pay their balance in full every month (as well as anyone who successfully follows his Rule 5: Try To Pay Off Your Credit Cards Every Month). That is a rather big exception that includes most people I know. This is advice is only good if you carry a balance or are tempted to.

Rule 10: A Credit Card Is A Tool

This is a great way to look at credit. He compares it to a hammer, similar to my previous comparison of credit cards to fire. I would be lost without credit, and I haven’t been “burned”, however many people die the financial death of bankruptcy when they let their debt rage out of control.

In Conclusion

All in all, I applaud Greg for making the effort, however his rules are a bit inconsistent. People who do not always pay off their balance in full need to play by some of his rules, while always trying to join those who never carry a balance. Those who never carry a balance, like me, will find many of his rules to be less than useful in maximizing their rewards. I imagine these rules work for Gary, however, I am not certain that all of these “rules” will work for you.