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How to build a better credit card portfolio

Allocate your credit to the right card at the right time

By Erin Peterson

Building a solid, diversified investment portfolio requires a mix of different products, from fast-growing stocks to safe-and-steady bonds to rock-solid Treasury bills. The same is true of the credit cards in your wallet. A smart credit card strategy can help you make the most of cards' benefits while steering clear of drawbacks. Credit card portfolio

Of course, if you've collected credit cards primarily because of the great introductory offer or the 10 percent discount offered on the first purchase, it's likely that you don't have a perfect mix of cards for your needs.

Read on to see how you can maximize the cards you have -- and how you can strategically trim or add cards to get the most out of each one. And keep in mind that quality -- not quantity -- is the goal, says Cate Williams, vice president of financial literacy for Money Management International, a national credit counseling firm. Many times, a single card can serve multiple purposes. "It's OK to have a few cards in your wallet," she says. "But you don't have to be a Hallmark card store. You don't need a card for every occasion."

YOUR CREDIT CARD PORTFOLIO

Experts say you should regularly inspect your credit cards, adding or deleting as your needs change. These are the most-common choices:

Your first credit card
The store card
The alternate card processor
The emergency card
The alternate card issuer The business card
The rewards card
The balance transfer card

The card: Your first credit card.
The reason: Nostalgia aside, your first card is a key to building a strong credit history.
How you'll benefit: A long credit history -- often starting with that first card in your late teens or early 20s -- is one of the keys to getting great loan rates, which can save you thousands of dollars over time.
What to look for: You've probably got it in your wallet already. If not, look for a credit card with a low interest rate, at least a 25-day grace period, and free online balance access and payment options.
When to ditch it:
If it's not a card you use regularly and you're getting hit with annual fees, you'll probably be better off dropping it, especially if you've got another card with a similarly long history.

The card: The alternate card processor
The reason:
If you rely only on a single card processor (such as Visa, MasterCardAmerican Express) or Discover you may find yourself in a bind if a store won't accept it. You may also miss out on some great deals.
How you'll benefit:
It's hard to put a price on peace of mind, but knowing you've got options in a pinch is valuable. And according to Scott Bilker, founder of DebtSmart.com, you can reap rewards at many locations. "For awhile, you could get discounts at Great Adventures Six Flags for using your American Express," he notes. Similarly, MasterCard has offered discounts on travel packages and sporting events just for using its card.
What to look for:
International travelers should be sure to have a Visa in their wallet, which is accepted in more places worldwide; otherwise, just be sure to have cards from at least two processors.
When to ditch it:
It's not worth it to have a second issuer if the card itself has crummy terms. Drop it and get a new one from another issuer if you don't like the card's conditions.

The card: The alternate card issuer
The reason:
You don't want to be at the whim of a single credit card issuer when the economy is rocky.
How you'll benefit:
If a company makes big changes, you can, too, says Liz Weston, author of "Your Credit Score" and an MSN Money columnist. "Some card issuers are imposing draconian changes even on their best customers," she says. "You want to be in a position to take your business elsewhere if you don't like the way they're treating you."
What to look for:
Find a card that has terms similar to the one you use most often, so you can swap issuers without a hitch if necessary.
When to ditch it:
When different issuers become the same ones. "Once a year, take a look at your cards to see if you need to diversify," says Weston. "There are so many mergers and acquisitions these days, you can start with cards from four companies and end up with cards from one."

The card: The rewards card
The reason:
Free flights, cold cash, cool merchandise. What's not to love?
How you'll benefit:
No matter what you crave, you can probably get it with a reward card, which is a fantastic perk if you use the cards wisely.
What to look for:
At a minimum, look for cards that offer at least 1 percent in rewards or cash back -- and look for cards that offer even better terms on certain purchases or at certain times of the year.
When to ditch it:
Can't pay it off each month? Dump it, says Williams. "The minute you revolve a balance, you lose all the value of those rewards," she says. And if you find the rewards points gathering dust, it's time to consider a switch.

The card: The store card
The reason:
If your spend thousands of dollars a year at a department store, big box store or other retailer, the oft-lambasted store card might just be a good deal for you.
How you'll benefit:
Think deals, discounts and advance info on sales. "I've seen cards that offer up to 30 percent discounts when you get it," says Weston. "You'll also get ongoing discounts and coupons. If you patronize a store a lot, it's definitely something to think about."
What to look for:
Try to find a card that's linked to a major processor such as MasterCard or Visa and can be used anywhere, rather than one that can only be used at one store. And choose wisely: select just one store where you tend to focus your spending, not a dozen where you can get a quick discount on a purchase and never use it again.
When to ditch it:
If you phase out your spending at the store or you carry a balance from month to month, it's time to bail. And definitely close accounts you used just once for the discount. They can make identity theft easier.

The card: The emergency card
The reason:
A medical emergency, midwinter furnace meltdown or flight to see a family member in trouble may mean you have a big bill due, but not the means to cover it.
How you'll benefit:
Life happens, but that doesn't mean you should be penalized for years to come as a result. An emergency card will give you reasonable terms as you whittle the debt down over a few months.
What to look for:
A high limit, low interest rate and long grace period will help you get back on your feet more quickly. Don't bother trying to grab rewards.
When to ditch it:
If you find that interest rates get hiked or your credit line has been sliced, don't panic, but start scouting for a new card.

The card: The business card
The reason:
If you run your own business or go out for lunch on the company dime, it's best to keep a bright line between business and personal expenses.
How you'll benefit: It's much easier to track expenses with a separate business credit card, and you won't accidentally forget to get reimbursed if it's a company-issued card. If the business is your own, the separate accounting will make it easier to record expenses and reap tax benefits. Weston encourages small businesses to have at least two different options. "As we've seen, your lines of credit can dry up really fast. Diversification is important for businesses, and you want to increase your chances of being able to access credit when you need it."
What to look for:
Anything goes if your company issues the card; if you're getting it for yourself, consider small-business specific cards, which often offer special perks such as no pre-set spending limits or extra rewards on common purchases including office supplies, hotel stays and flights.
When to ditch it:
If you close up shop on your own business, drop the card; and if you're tempted to put nonbusiness expenses on the card, it may also be time to re-evaluate.

The card: The balance transfer card
The reason:
You're laser-focused on paying off debt -- and not incurring any new charges.
How you'll benefit:
There are still deals to be had on balance transfer credit cards, as long as you don't make a game of it. Done wisely, you'll save money overall.
What to look for:
Find a card with low balance transfer fees and rates -- and then put the card on ice, says Bilker. "You might have a 0 percent transfer rate, but a 10 percent purchase rate. So set that card aside and don't use it."
When to ditch it:
You've paid off the balance. Don't tempt yourself with a brand new opportunity to get into debt.

See related: 5 new rules for the balance transfer game

Published: September 22, 2009


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