CNBC has an article with advice from “financial expert” Kevin O’Leary from Shark Tank about how many credit cards you should have, and how you should use them.
And it’s really, really bad advice. Which I’m sorta sad to see, since he has always been my favorite guy on Shark Tank.
His advice centers around the following:
- How many credit cards you should have, and why
- How many credit cards he has, and the ridiculous reasons for it
- Why you should earn cash back
Let’s look at the advice more closely, and why it’s (mostly) wrong.
How many credit cards should you have
Kevin says you should have two credit cards:
- You should have one credit card with a “very low limit” (he says $2,000), and that’s the one you use for online purchases; that way if it gets hacked, nobody can spend more than $2,000, so that’s how you protect yourself
- Then the other credit card is one you use when you actually buy things that are not online; that way you haven’t “exposed that number to the internet,” with one card being “out there,” and the other being “private”
No, no, no, no. This advice really makes very little sense.
First of all, credit cards offer fraud protection, so in the event your card information gets compromised and you report it to them, you won’t be on the hook for it.
Second of all, just because you only use a card in-store rather than online doesn’t mean the info can’t be compromised. Your credit card information can also be stolen from in-store transactions, whether it’s due to credit card skimming, or someone just easily stealing your card info.
You’re harming your credit score greatly by having a card with a really low credit limit that you use constantly. One of the major factors of your credit score (30%) is your credit utilization, and if you’re using that card regularly up to close to the limit (because the limit is so low), this is going to have an adverse impact on your credit score.
How many credit cards Kevin has
Kevin says he has eight credit cards. For a moment I thought “great, he’s good at maximizing rewards, that’s at least one redeeming quality of this story.”
But nope, the premise is that Kevin travels frequently internationally, so he carries eight credit cards in multiple currencies, like Swiss Francs, British Pounds, Euros, etc. As he explains it:
“I look for efficiency, and having all these credit cards gives me diversity. It makes sure that I’m not being charged for currency conversion. Drives me out of my mind when I’m buying something in London and I’m getting whacked on a conversion price back in U.S. dollars. That doesn’t happen to me, because I have one in British pounds. My whole thing about credit cards is I don’t like fees. I’m cheap.”
It’s 2018. There are tons of amazing cards without foreign transaction fees. Maybe he’s suggesting that even without foreign transaction fees, the “spread” between the official currency conversion rate and the Visa and Mastercard rates is really bad? Well, you can find the currency conversion rates used by Mastercard and Visa online, so the math is quite easy to do.
On a card without foreign transaction fees, typically the “spread” you’ll find between the official conversion rate and bank conversion rate is somewhere around 0.1% (this cushion is built in due to account for the fact that transactions only post a couple of days later). Now, when you’re abroad you’ll want to always make sure you’re paying in local currency rather than your home currency, because if you pay in home currency you’ll get a bad rate. But that’s a choice.
Kevin says he likes to do this because he’s “cheap,” though last I checked, throwing money out the window isn’t cheap. Does he have cards that offer at least 2% cash back in Swiss Francs, British Pounds, Euros, etc.?
Because it doesn’t seem to me to make sense to use a card that “saves” you 0.1% on a transaction and forgo a 2% return in the process, no?
Why you should earn cash back
Kevin says the following:
“Forget about affinity points. There’s so much inflation in that. You get less and less every year for the points. Get the cash back.”
Okay, that’s not necessarily terrible advice, though see below. 😉
My credit card advice
I can appreciate the need to provide “simple” credit card tips when talking to the mainstream media, so I don’t blame Kevin for the lack of caveats he provides, since I’ve been in the same situation many times where there’s so much to say, but they just want one sound bite.
But this advice is just plain bad. It’s paranoid (suggesting only credit card information online can be compromised), it’s bad (having a card with a low limit and spending a significant amount on it harms your credit score), and it’s illogical (being “cheap,” and therefore getting a card in different currencies, rather than maximizing rewards on purchases).
So, what’s my simplified credit card advice?
- If you’re going to get a cash back card, make sure it has no annual fee and earns at least 2% cash back, like the Citi® Double Cash Card, which offers 1% cash back on every purchase, and then an additional 1% cash back when you pay for those purchases; don’t settle for less cash back than that (a vast majority of people do)
- To improve your credit score, open a few cards (they can even have no annual fees), hold onto them long term, make payments on time, and don’t utilize too much of your credit; having at least a few credit cards is good for your credit, as it helps you establish more positive history
- I agree in general to avoid putting your spend on an airline credit card (I’ve offered similar advice in the past), but often transferable points currency cards give you the best of both worlds and protect you from devaluations, as you can redeem points towards travel purchases, or transfer them to airline partners; so consider a card like the Chase Sapphire Preferred® Card or Citi Premier® Card (review)
Anyone have anything else to add?