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Creating the Optimal Credit Card Portfolio

Debt: most of us will use it sooner or later, so let’s learn to use it to our advantage and manage it well.

You can design the perfect credit card limit portfolio that provides access to credit when needed while limiting fraud risk, keeping you on budget, and building a great credit score.

Your goal is to maintain three open credit cards with $0 balances for the next 20 years. Only take out installment loans (i.e., student, auto, and mortgage) as necessary.

Credit card No. 1 has up to a $500 credit limit. This is your starter card you get when you’re 18 years old. 20 years from now you might still have this card as it serves many purposes. You can keep this card in your wallet as an emergency backup such as when other cards are declined. It is the card you take when travelling to places where there’s a chance you could lose it like going on a boat, or crazy drunken night on town.

Use this card when paying a shady person or business you don’t trust, so you limit the possibility of fraud, and anxiety of fraud. The small amounts are easily disputable and won’t disrupt your checking accounts or freeze your everyday credit card. Because the card has a small limit, having rewards or a low APR interest rate are less important.

Credit card #2 has a credit limit of four times your monthly budget for discretionary spending. If your budget is $1,000 then request a $4,000 credit limit. Credit scores penalize you when you max out cards, so setting a limit of 25% utilization builds a good credit history while allowing a little grace room should you exceed your personal limit. This card is your everyday card you carry in your wallet.

Like an old fashion “charge card” you pay it off every month. You stay on budget as long as you don’t exceed your $1,000 limit and therefore you won’t have to worry about money daily. Stick to this one card, it’s easy to lose sight of your budget when using multiple credit and debit cards. When a credit card is paid off every month you don’t pay interest charges, so it is less important what the APR interest rate is. The card can have a rewards program since you use the card frequently. But consider yourself forewarned as rewards programs encourage you to spend more than you plan to. If fraud should occur with this card, you’ll have your two other cards to fall back upon while you dispute wrongful charges.

Credit card #3 has a high credit limit. It takes your portfolio limit up to 3 months of your gross income. For example, this card’s limit would be about $10,000 for someone making $60,000 per year. Why 3 months, because you should have 3-6 months in liquidity for hiccups in life, and credit cards are liquidity when you need it. This card you keep at home, not in your wallet. It is for emergencies or for large planned purchases. You keep this balance at $0. When using it to finance something big, pay it off with your savings account or create a plan to bring it back to $0 as soon as possible.

People get into “credit card debt” because they charge things up with no plan to pay the balance in a set time and instead only pay the minimum monthly payment. This card should have as low an interest rate as possible, because if you do run it up in emergencies, you don’t want to compound the problem with high interest rates that make it difficult to pay back. This card shouldn’t be a rewards card because you don’t want incentive to use it unnecessarily.

Create your own Limits! The Savings Coach

This article was originally published on 9/5/2014

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