For most of us, flipping the calendar to a new year means thinking about taxes. While you're waiting for your W-2 to arrive in the mail, consider using the next few weeks to map out your credit card strategy for 2011. This could be the year you turn your credit cards into valuable, money-saving tools instead of accounts that suck finance charges from your bank accounts. Even if you've already hit some setbacks on your new year's resolutions, the first month of the year still gives you plenty of time to get your credit cards in order.
1. Check your credit report.
You get one free credit report every twelve months from each of the three major credit reporting agencies. Use the start of the new year to start a new habit: checking one of those reports every four months. Because credit card issuers sometimes take weeks to post changes to your account status or your average balance, looking at a free credit report every January, May and September gives you many of the same benefits as a paid monitoring service. Although it always costs a few dollars to check your FICO score, some websites can estimate your credit score for free.
2. Review your cards' rewards.
Credit card issuers changed many of their reward programs in 2010. Last year's favorite card might not give you the same benefits in 2011. Some programs added redemption fees that make enjoying rewards expensive and impractical. Likewise, some card issuers made their products even more attractive by eliminating foreign transaction fees or expanding their rewards programs. Using your bank statements, your desktop financial software, or an automatic budget monitoring tool like Mint.com, review how much you actually spend each year in each purchasing category. You could be overlooking an opportunity to earn bigger rewards by using one of the cards already in your wallet.
3. Match your spending to the best new reward programs.
Some lenders have targeted affluent prospects, while other credit card issuers focus on heavy travelers or frequent grocery shoppers. Although opening a new credit card account may impact your FICO score by a few points, you might consider an affinity credit card from a website or a retailer where you shop often. Some cards offer bonus rebates for shopping in a certain category, like making travel purchases or buying groceries. Other card issuers offer special online shopping portals that let you earn extra discounts of up to 20% of common purchases.
4. Compare your best cards to new offers.
With the banking industry generally healthy again after a few years of crisis management, attractive credit card offers have started arriving in consumers' mailboxes once more. You could wind up saving money with a lower APR or earning bigger and better rewards during 2011 than with your current cards. Although most lenders have adopted upfront balance transfer fees of up to five percent, you could still save money on balances you'll need to float for a while.
5. Balance your balances.
The most popular credit scoring systems consider both the number of credit cards you hold and the amount of available credit on each account. Imagine you've got just two credit cards. One has a balance of $9,000 against a $10,000 credit line and the other boasts a completely unused credit limit of $25,000. Under most scoring systems, you'd score lower than a consumer with the same $9,000 debt spread out evenly across five cards with credit lines of $7,000 each. Many experts estimate that credit utilization rates of 30-50% across all your open accounts can help you earn the highest credit scores.
6. Roll your debt snowball.
Dave Ramsey popularized the "debt snowball" idea on his syndicated radio show, and it makes a great money metaphor when snow's falling on most of the United States. Instead of paying down the credit card with the highest interest rate, set a goal to quickly pay off the account with the smallest balance. That way, you can enjoy the endorphin rush of closing out a redundant account. You may lose a few credit score points if you close out an older credit line, but your improved credit utilization should offset the drop. Whether you want to eliminate debt entirely
Changing your mindset about credit cards can help you build a stronger financial foundation that combines convenience with value and security. Even though banks and merchants continue to battle over the fairness of transaction processing fees, the right reward program can put most of those surcharges back into your account. Additional features, like fraud protection and warranty extensions, can help mitigate annual fees or finance charges over the course of the year. Use the first month of 2011 to start tracking how much you spend and how much you save on each credit card, so you can make even better decisions in 2012.