Choosing a credit card

How many and which ones

We’re taking a break from investments and asset classes to focus on other aspects of personal finance, starting off here with credit cards.

Many people just take whatever credit card their bank offers and stick to it for ages. This is great, if you’re the bank, but really bad for you otherwise.

First, a disclaimer. Credit cards can be both boon and bane. The only correct way to use one is to pay off your bills in full every month. This gives you access to free credit, convenience and rewards without losing any money to fees. It also helps you build up a good credit rating, which will help you in other financial transactions.

Today’s article is about maximizing the benefits you can derive from a credit card. There are entire sites devoted to reviewing cards, categorizing and ranking them, and keeping up to date on the latest promotions. I strongly suggest that if this article resonates with you, you move on to those sites before making any decisions. As always, I’m not naming any, as each caters to a single country, so google is your friend.

What do you get from a credit card? Depending on the card in question, it can be any or all of the following:

  • Rewards in the form of points or cashback on every transaction you make
  • Accelerated rewards on transactions made with partners
  • Purchase protection in some countries
  • Accidental insurance
  • Airport lounge access
  • Golf course access
  • Themed discounts or offers - dining, entertainment, travel and so on
  • Concierge services

and a whole lot more.

These benefits come from three sources - the card issuer(the bank issuing the card), the partner(s) - think co-branded cards with Apple or Amazon or Walmart, and the payment network(Visa, Master, Amex, etc.), so variety across these dimensions is good.

Typically, the higher the tier of the card, the better the benefits and the higher the fees. Fees are sometimes waived off in case of spends crossing a certain threshold, so it is sensible to have only as many cards as you need and maximize the benefits out of them. There are cards that you’ll be able to get a card fee-free for a lifetime - these could be the standard terms or specific to you. It pays to research the options and promotions on offer.

With hundreds or thousands of cards on offer, what’s a good general strategy?

I’d suggest having three cards, increasing them to no more than five over time :

  • A general usage card that offers a good reward or cashback rate on any transaction. This is your fallback card - the card you use when one of the other cards doesn’t make sense
  • A card or two that aligns with your household’s spending patterns - say if you buy all your groceries from Amazon or Walmart, it pays to have a co-branded card that has a high reward rate with them and their partners.
  • A card or two that aligns with your travel or entertainment patterns - these will accrue accelerated rewards when you fly or eat out or go to the theatre, and you can cash them in for offsetting your personal travel or dining spends.

I suggest having multiple cards for four reasons:

  • No card is the best across all situations. Having a few allows you to maximize your gains.
  • Distributing your spending across multiple cards allows you to use only a fraction of your credit limit on each, which will boost your credit score.
  • If you change your mind over a card, you can close that account without making too much of a dent in your credit score. Credit scores have a strong weighting towards having multiple sources of credit and the age of those sources. If you had just two cards and close one out, it won’t look pretty on your next month’s score.
  • Banks offer upgrades to long-term customers based on their usage, allowing you to get to invite-only cards or have concessional rates or fees on premium cards.

Beyond a point, this diversification offers no real benefits, and you’ll have too many cards to usefully manage them.