Jenelle wrote in recently and described her way of using credit cards:
Unlike your advice to minimize your credit cards, I actually have eight open credit cards that I use all the time. These cards cover all of my purchases but each one has a particular bonus program that I can take specific advantage of. Twice a month, I just log onto the online service for each card and pay each one off in full.
In essence, Janelle is describing having a portfolio of credit cards, enabling you to use the one with a very high reward benefit with every purchase. In some ways, this plan does make a lot of sense, but there are some severe drawbacks as well. The trick is finding a routine that works for you. Let’s take a closer look.
My Would-Be “Credit Card Portfolio”
In order to figure out what this situation would look like for me, I went through all of my spending over the last month and figured out several general areas of spending, mostly based on where I spent the money. From there, I started looking for cash back credit cards (or those that offered cash rebates) that specifically lined up with those areas.
Gas expenses (21% of spending) could be shaved big time if I focused exclusively on one gas station. For instance, the BP Card earns 5% cash back on all purchases at BP, so if you use that as your exclusive station, you’ve got an immediate 5% rebate on all of you gas spending.
Other automotive expenses (5% of spending) could be covered by the Discover Open Road card, which gives a 5% cash back bonus on all automotive expenses.
Online shopping (21% of spending) allows you to use something like the Amazon.com Visa, which gives you 3% in rebates for all purchases at Amazon.com, which works well for us since we buy bulk items there, among other things.
Department store shopping (14% of spending) almost always offers a decent rewards credit card for in-store shopping. Since we mostly shop at Target (a Super Target is the nearest department store to us), we can get a card there that gives us a 10% off coupon for an entire shopping trip for every $500 run through the card. If you shop there spending $100 every trip, saving up big purchases to spend $300 when you have a 10% off coupon (saving $30), that means you save $30 on every $500 in purchases, or about 6% back.
Grocery store shopping (29% of spending) and other purchases (11% of spending) would perhaps best be covered by the American Express Blue Cash card, which offers 1% cash back up to $6,500 worth of spending, then 5% cash back on all purchases after that. If you spent $12,000 on the card in a year (by running some of your bills through it, for example, and doing all of your grocery store shopping with it), for instance, you’d wind up with an effective rate of about 3% over the course of a year.
So let’s say I spent $1,500 a month through these cards at the percentages described. On the gas card, I would spend $315 and earn $15.75 in cash rebates. On the other automotive card, I’d spend $75 and earn $3.75 cash back. On the Amazon Visa, I’d spend $315 and earn $9.45 in rebates. With the Target Visa, I’d spend $210 and get $12.60 back. On the remaining card, I’d spend $600 and earn $18 back. All told, my returns would be $56.55 over that month on spending of $1,500 – that’s approaching a 4% return on the spending. For my life, at least, it would work pretty well, at least at first glance.
Dangers and Drawbacks
As with anything involving credit cards, there are a lot of dangers and drawbacks to this plan. As I said before when commenting on the credit card “holy wars”:
look at credit cards as being like a very dangerous power tool. If you’re careful and take the proper precautions, they can save you time and shower some rewards on you as well. On the other hand, if you use credit cards with reckless abandon, you run the serious risk of some intense financial damage to yourself.
Using this “credit card portfolio” idea amplifies the above statement. A 4% return across all of your spending is nice, but it’s fraught with complications and potential traps.
There’s more maintenance effort. Having several cards with active balances on them means more footwork. As Jenelle described, she puts in significant time just maintaining the cards, going through a session twice a month where she logs onto eight different online accounts. Not only that, you then have eight accounts sending you all sorts of stuff in the mail – and you do get stuff, even if you opt out. Even if this whole process only added up to an hour each month, it’d still only net me a little bit more than the straight 3% I get from my current card use – is that extra hour of online busywork worth $14 or so? It isn’t for me.
There’s a greater risk of identity theft. Using this plan means you have more open lines of credit, which means a slightly increased risk of identity theft. If you have several cards, after all, it’s easier to lose one and not notice it for a while. If you have several numbers out there, it’s easier for one of them to be nabbed.
One mistake undoes the benefits. If you’re late even once on just one of these cards, you’ll undo the benefits you gained. In other words, to excel beyond just using one or two cards, you have to be eternally vigilant.
Having a lot of credit cards can make it psychologically easier to buy unnecessary stuff. “But I can get 4% cash back if I buy it” is not a reason that should be ringing through your head when considering a purchase. Instead, ask yourself whether the purchase is really worthwhile at all – ignore any “benefit” from the card.
Having a lot of credit cards with low balances and high credit limits can be bad for your credit score. Sure, your debt-to-credit ratio is low, but 10% of your credit score involves the types of credit you have access to and use, and having a lot of revolving credit is not a good thing.
Overall, there are too many drawbacks to such a plan to make it worthwhile for me. I’m not going to invest the time or energy to do that much card-hopping and account maintenance to just get an extra percent back on my purchases. I’ll stick with my original simple plan, I think.