How many credit cards do you need to maximize benefits while at the same time “simplifying your life”? It’s definitely a delicate balance and I’d say it just depends on what your specific objectives are. Some may want to expedite paying off debt, while others are more interested in maximizing credit card rewards and benefits. I get this question a lot from close family and friends. By no means am I an expert in credit cards, but Odysseas from Card Hub is. In this guest article, Odysseas explains how compartmentalizing your credit card use can benefit you.
You know what could really help your finances? Some good old fashioned compartmentalization. This might at first seem like odd advice, but to clarify, I’m not advocating that we all adopt psychological defense mechanisms.
In this case, compartmentalization actually refers to the process of strategically isolating different types of credit transactions and needs in order to minimize interest costs, expedite debt freedom, and maximize rewards earning. It’s called the Island Approach to credit card use, and it could save you hundreds of dollars.
That’s a good thing too because many of us are having trouble actually applying the lessons taught by the Great Recession. Despite witnessing firsthand the ill effects of overleveraging, we continue to spend beyond our means, incurring new credit card debt at a record clip in 2011, according to Card Hub debt studies.
It appears people are unwilling to accept the fact that pre-recession spending levels were tied to the housing bubble and that this means a number of expenses once considered to be necessities must be forgone. A change of perspective is needed, which is actually where the benefits of the Island Approach begin.
You see, it can be difficult to evaluate spending habits when your monthly statement is a jumble of old debt, finance charges, and new monthly purchases. However, if you use separate credit cards for revolving debt and making everyday purchases, it will be abundantly clear if and when you are spending beyond your means.
Why? Well, you should always pay everyday expenses in full, which means that the presence of finance charges on your credit card account designated for everyday spending will serve as an obvious indicator that spending adjustments are required. By making these adjustments and getting in the habit of paying your bills in full on a monthly basis, you stop the addition of new debt, which makes it easier to concentrate on ridding yourself of that which already exists.
There are three ways the Island Approach helps you save time and money in reaching debt freedom: 1) it allows you to get the best rates; 2) it puts payment allocation in your control; and 3) it lowers your average monthly interest-bearing balance.
The Island Approach is also beneficial once you rid yourself of debt because it promotes a strategic rewards card arsenal. You see, much like a single credit card is unlikely to have the best rewards and the lowest rates, it’s also unlikely to have the best rewards on all of your biggest expenses. Therefore, getting 2-3 different cards that each provide market-best rewards on your biggest spending categories (e.g. gas, groceries and travel) would be extremely powerful.
Finally, the Island Approach helps small business owners garner a combination of debt stability and unique business benefits unavailable via a single card. While business credit cards offer a number of special features – expense tracking capabilities, customizable limits for employee cards, and centralized rewards earning, for example – they do not have protection under the CARD Act, the personal finance reform law that instituted a number of important consumer protections in 2010.
That means business credit card users could see interest rates on existing balances increase at any time, for any reason. By using a business credit card for purchases that will be paid off in a single billing period as well as a personal credit card for those that won’t be (i.e. business funding), you’d get the best of both worlds.
All in all, like a vacation to an exotic island, the Island Approach to credit card use can sure help relieve some stress. Unlike a trip to a faraway beach, your wallet will benefit as well!