Answers to 10 key questions about credit cards

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Credit Cards Vs. Debit Cards

Judging from our inbox, there seems to be a lot of credit confusion out there.

You've got questions: How many credit cards should you carry? When should Junior get his own card?

Luckily for you, we've got answers.

1. How many credit cards should I have?

Ah, this would be the $64,000 question. Some well-known financial gurus would tell you the answer is none. Meanwhile, other card experts say you can have a lot more. Brian Kelly, the "Points Guy," says he has up to 20 active accounts open at any given time so he can rack up hotel and airline credits.

However, Adam Levin, co-founder of our partner site Credit.com, suggests a more middle-of-the-road approach. He advises having two cards — a rewards credit card for everyday use and a low-interest card to be used for emergencies.

Why not have just one good all-purpose card? Mainly because you'll want to earn rewards from your purchases, but airline, gas and cash-back cards tend to have higher interest rates. That's fine as long as you're paying off your balance each month.

But when the water heater says "No more" and your savings account says "Yeah, right," you'll want a low-interest credit card waiting in the wings. You don't want to carry a balance on a high-interest rewards card.

2. Should I carry a balance?

Heck, no!

Unless you're self-financing a purchase or dealing with an emergency situation, paying credit card interest is just plain dumb.

Some people believe you need to carry a balance for your credit score to benefit, but that's not really the case. You can read this article to learn more about why no balance is needed to boost your score.

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Answers to 10 key questions about credit cards

Dog-sitting, babysitting, or house-sitting

These jobs are always in high demand, and the best part: you can name your price and create your own schedule! Post an ad on craigslist, or use your friends' and family's connections to get your name out there. 

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Rent out your space 

List your apartment on Airbnb or another rental site, and make some easy cash by staying at a friends and renting out your place for the weekend.

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Share your space

Just as you can rent out your full apartment or house, you can also post a free room (or even just your couch!) on sites like Craigslist or Airbnb. This way you can split your living expenses -- and maybe even make a new friend!

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Sell your body parts

Now here's a weird one: Donate your hair, breast milk, or even plasma for a profit. According to Grifols, if you're healthy and weigh above 110 pounds, you can earn up to $200 a month donating your plasma to life-saving medicine. 

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Sign up to participate in medical tests and clinical trials. 

Universities constantly need volunteers to test new medicines and treatments -- and because the pool of willing participants is limited, there is typically a large compensation for being a guinea pig. 

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Participate in a focus group

Companies and organizations will pay you to join a focus group. These can be conducted in person, online, or via phone. You will most likely be reimbursed in cash or gift cards -- plus, you often get to test out fun new products! 

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Take online surveys

Similar to focus groups, you can get paid to give your time and insights on an online questionairre. Plus, you can do this from the comfort of your couch. 

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Bank on your sperm

Although we don't necessarily recommend this option, there is a very high demand for healthy sperm donors. Keep in mind some of the obvious drawbacks, but sperm donation is non-invasive and highly compensated. 

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Crowdfund your dreams

Crowdfunding allows you to raise monetary contributions from a large group of people who want to support your venture. Post your project or idea on a crowdfund site, like GoFundMe.com, and see the cash pile up.

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Become a tutor

If you're qualified, post an ad online or on a community board to tutor children on their school courses or for the upcoming SATs.

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Get a part-time job

Capitalize your free time (on the weekends or after work hours) by working a part-time job. A bartender, waiter, or Uber driver are all great options for an additional source of income -- and great tips! 

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Resell tickets

Take this suggestion at your own risk: If you're staying within legal limits, buy tickets low and sell high as an effective way to source additional money. (Just make sure to check your state and local laws first!)

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Rentafriend.com

You can sell anything on the internet these days... including your companionship! Get paid to go on a platonic outing for a few hours and enjoy your afternoon with a new friend. 

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Rent out your parking spot

Make sure to check with your landlord first, but if you have the option to park your own car further away, lend or share your parking space or driveway for the hour, day, or even month! 

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Keep a coin jar 

This one takes patience before a big pay out, but keep a spare jar or drawer for loose change that you usually toss anyway. It will keep it all in one place -- and those quarters do add up! 

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Make something to sell 

If you have a knack for arts & crafts, create jewelry or other handmade gifts to sell on sites filled with other thrifty vendors like Etsy

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Sell items online

This effective strategy requires low effort with a high return. Post photos of your used or non-used items on sites like eBay or Craigslist, and let the bidding begin! 

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Have a yard sale

Sell clutter you've been meaning to get rid of right in your front yard. This simple tactic is convenient, and guarantees a wad of cash right to your pocket.  

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Return past purchases

This tip may seem obvious, but is often overlooked: Take your recently-purchased items that are laying around back to the store for either store credit or a full refund. 

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Recycle scrap metal and cans

Collect cans and scrap metal out your own garbage, basement, and street and bring to your local recycler to exchange your findings for money.  

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3. What exactly is my credit score and how is it calculated?

Speaking of credit scores, some people are a little hazy on what they are and how they are calculated.

While several different companies create credit scores, the one most likely to influence your access to credit and interest rates is your FICO score.

Your official FICO score ranges from 300 to 850. This is usually the one companies use to decide how well you manage credit and how likely you are to pay them back after borrowing. The higher the score, the more trustworthy you appear to creditors.

The score is created and weighted with this information:

  • Payment history: 35 percent
  • Amounts owed: 30 percent
  • Length of credit history: 15 percent
  • New credit : 10 percent
  • Mix of credit types: 10 percent

FICO doesn't say what constitutes a good or bad credit score. However, typically, if your score is below 600, you're probably viewed as risky business. A score above 800 will generally get you the best interest rates and terms.

For more information, read our article on credit score fact and fiction.

4. How often should I check my credit score?

Levin suggests looking at your credit score frequently. It's easy to do, without paying. Here are many sources, including credit cards, banks, credit unions, financial counseling agencies and lenders, where you can get your official FICO score for free.

Once you get a look at that magic number, you may want to take this advice on how to raise your score quickly.

5. I'm ready to ditch my debt. Do I pay off the card with higher interest or a higher balance first?

The answer to this question also rests largely on which financial guru you ask.

Some argue you should start with the smallest balance, only because quickly paying off an account can give you the momentum needed to stick to your debt diet.

However, from a purely financial standpoint, it is better to start with the highest-interest card. Paying off the high-interest card first usually saves the most money.

6. Should I co-sign a card for a friend or family member?

Absolutely not.

Co-signing for a card or loan puts you on the hook for the balance if the friend or family member stops paying. Or if the borrower makes late payments — which you may never know — it could also negatively affect your credit score.

You may protest: "But I know that wouldn't happen. They are really good people!"

I'm sure they are, but sometimes even good people make poor money decisions. Or life takes a turn you didn't expect. Rhonda knows all about that.

Bottom line: You shouldn't co-sign unless you're ready and able to assume the debt as your own in the event your co-signer — for whatever reason — can't pay.

7. When should my child get her or his first credit card?

Probably not until he or she has a real job and some emergency savings.

Children must have their own money before they start using someone else's cash, so a steady job is a must. A work-study gig in the campus cafeteria for three months doesn't cut it either.

Emergency savings help ensure that the child doesn't get sucked into using a credit card for every minor crisis or shopping whim. Students need to get into the habit of saving before they focus on the habit of spending.

Educate your children on smart credit habits, hope it sinks in and refuse to co-sign any applications for them.

8. Should I close the account on a credit card I no longer use?

If you are concerned about your credit score, Stacy Johnson suggests it may be best to keep your credit card account open.

You also may be interested to hear what FICO says on the subject: "We never recommend closing a credit card for the sole purpose of raising your FICO score."

9. Is it ever smart to pay an annual fee?

For most people, the answer is no, although you may need to do a little math to figure out what's best for you.

You see, there are plenty of great credit cards that are fee-free. That means typical cardholders probably shouldn't be paying for the privilege of charging their purchases.

However, if you're a heavy user, it may make sense to splurge on a card with a fee. A few years back, I interviewed a frequent flier who told me he happily paid somewhere in the ballpark of $400 annually for his premier airline card. It was money well-spent because it included a sky club membership valued at somewhere around $700 per year.

He would have bought that membership anyway, which meant he was saving money before he spent a single cent on the card.

Look at the rewards you earn versus the annual fee and see if the card pays off. Be realistic, though. Don't calculate in the value of perks you'll never use when deciding if the annual fee is worthwhile.

10. I made mistakes and destroyed my good credit. Should I get a credit card to rebuild it?

Maybe.

If you've ruined your credit, you need to do a little soul-searching before filling out a credit card application.

Yes, using a card responsibly may help you improve your credit. At the same time, it could just dig you a deeper hole if having plastic makes you lose all spending self-discipline.

A secured credit card is one way to test the waters. Or there are other ways to rebuild credit without a card.

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Answers to 10 key questions about credit cards

Automate your finances. 

Set up your finances so that money is taken straight from your paycheck and deposited directly into your savings account or a retirement savings account. You can also set up your fixed bills like your Internet and cable to be automatically deducted from your checking account. Automate your finances to save time and prevent overspending. If you see extra money in your account, chances are you’ll find a way to spend it, leaving you little to invest in your future. Automation helps keep your priorities in line so that as money comes in, it is dispersed to your other accounts immediately.

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Cut back. 

At least twice a year, look at your expenses line by line and see if you’re getting the most bang for your buck. For example, do you read the magazines you subscribe to or maximize that gym membership? If the answer is “no,” consider canceling or negotiating a better rate. Take that money you save, and apply it toward bigger payoffs like debt reduction, retirement or an emergency fund.   

(Photo: Getty)

Get rewards. 

Lots of people use debit cards to make it easy to buy and budget for groceries, gas and other routine purchases. Instead of doing that, look into a credit card with a great rewards program for those daily purchases, and set it up to automatically pay the statement balance from your checking account each month. Over the course of the year, you could potentially pocket a few extra hundred dollars just by using a card with a good rewards program instead of your ordinary debit card (just make sure you’re paying off your credit card every month, so you don’t pay extra in interest).

(Photo: Getty)

Boost your income. 

If you love your job and want to grow your career, it's time to think about boosting your income as well. Make it a goal to negotiate a raise this year. Consider your strengths and look at the value you've provided to your company over the last six months to a year, and discuss it during a performance review. This can feel intimidating, but it never hurts to ask.

(Photo: Getty)

Get a side gig. 

Take advantage of your skills, or turn a hobby into profit. Doing so can help you generate extra income – which you can put toward reaching your financial goals. Etsy, for example, is a great place to sell one-of-a-kind products.  If you have Web design, copy editing or other creative skills, consider offering your services on freelance websites such as Fiverr or Elance. These types of side gigs will allow you to earn extra income while also growing your skills.

(Photo: Getty)

Track your progress. 

You can’t save money if you don't know where your money is going. Every month, track your net worth using a personal finance tool or app that will show you exactly where your money is going. This will make you think about your entire financial picture from income and expenses to investments and taxes. With this focus, you can ultimately make the greatest impact on your finances in 2015.

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Marilyn Lewis contributed to this post.

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