Money Monday: Doing the Credit Card Shuffle

The Question Should be How Many Are in Your Wallet, and What are You Doing With Them?

Don’t check now, but how many credit cards are you carrying in your purse or wallet ? If your answer to the question is more than 4, you may be trending above the average.

According to a report by Credit Karma last year, the average American has 4.7 credit cards. Studies have shown that the more you use credit cards, the more likely you are to overspend. If that is true, perhaps it may also be true, that, the more credit cards you own, the more you are going to overspend. Do you actually need those many cards, and why?

Track Better to Avoid Overspending

The most popular or used credit cards are Visa and Mastercards. Visa captures over 50% of the credit card users in the country, with Mastercard, American Express and Discover lagging far behind. What you should know is that these companies do not benefit from credit card fees. Your credit card fees are actually a product of the lending institutions which are your banks and credit unions and not Visa or Mastercard. These processing companies earn money from the merchant or vendor on each transaction, and that is how they are compensated.

Before selecting a credit card consider your lifestyle and spending habits. Track in which you spend, and how much for each. This is crucial because credit card rewards and points fit into certain consumer spending areas and it would be wise to align your credit card and usage with those areas. To illustrate my point, let’s examine three categories of spending.

Rewards for Daily Spending

Daily spending or everyday spending includes grocery shopping and the purchases at box stores such as Walmart, Costco and Target. According to the U.S. Census Bureau the average family is spending more than $1,000 in groceries per month.

If the way you pay your monthly bills is to charge your expenses and then pay it off at the due date, American Express cards may provide enticing rewards. For example the American Express Blue Cash Preferred has a sign up bonus of $250 if you spend $3,000 in the first six months. This card provides 6% cash back rewards up to $6,000 annually. The down side of this card is that purchases from Walmart or Costco are excluded from the rewards computation. Everybody has to eat, but if you shop at those stores frequently, this card is not a fit for you. On the other hand if your are a Whole Foods or some other grocery shopper, you can benefit tremendously from a card like this. The same is also true for the American Express Gold Card which provides 90,000 points if you spend $6,000 in the first six months. But once again the negative on this card is that purchases from Walmart and Target are excluded from your rewards benefits.

Rewards for Investment Spending

This credit card is somewhat novel but a forward leaning and creative investment and savings idea. Fidelity Investments, provides a Visa Rewards Card with your Fidelity Investment. Using your Fidelity card can earn you 2% rewards with each purchase. The good news here is that your rewards can be directed back into your savings accounts, a 529 college savings account for your children, health savings account and even a donor advised fund for charitable contributions. Additionally, you could direct your rewards to relative or a friend’s account with each purchase (except for their donor advised funds). Therefore, if you have a Fidelity brokerage or some other kind of investment account and obtain their credit card, your spending and rewards can turn out to be an additional source of investment income.

Rewards for Just Spending

The everything cards are those which are not directed or targeted to any particular category of spending. Citibank has a Citi Double Cash Mastercard which provides a $200 signing bonus if you spend $1,500 on purchases within the first six months of receiving your card. Basically, the card provides 2% cash back rewards on everything you purchase, even for paying your bills. You can earn an additional 5% rewards for travel if you use Citi travel portal to book your travel, hotel and car rentals.

Another card option which provides cash back rewards on any purchase is the Wells Fargo Active Cash Visa Card. This is one of the easiest and simplest cards available. If interested this card provides a $200 signing bonus if you spend $1,000 in the first three months.

Let me end where I began. The answer to the question regarding why the average American has four and five credit cards is because today’s credit cards are not one size fits all. Credit cards, if you will, have become specialized. Based upon your lifestyle and spending habits, you now need to acquire cards which provide the best rewards and benefits. One problem this now creates is that by some reports over 70% of African Americans are credit card holders, but carry more debt.

WHAT’S UP!

Today’s What’s Up is about the 50.30. 20. Rule. Senator Elizabeth Warren, who was a law professor at Harvard, is credited with developing the 50.30.20 Rule. You should spend 50% of your take home pay on Needs, 30% on Wants and 20% on Savings. How would you grade your financial spending in 2024 when measured against this rule? And don’t forget to add your giving. And that’s what’s up!

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