How compartmentalization can help control spending

The Credit Card Island Approach

by Odysseas Papadimitriou


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Two things that people these days really seem to love are rewards and debt. The type of love in question obviously varies between the two, but you simply can't ignore the allure of vacations on a bank's dime or the fact that U.S. consumers have racked up roughly $82 billion in new credit card debt in the past two years alone.

The conundrum that this love fest creates is how to balance these competing interests with what's best for your wallet. Habitually spending more than you bring in isn't sustainable, after all, and no single credit card offers the best possible rewards in addition to the best possible interest rates.

So, where does that leave us? The Island Approach to credit card use offers one possible solution. This compartmentalization strategy is built on the idea that you can garner the best possible collection of product terms and make your personal finances easier to manage by using different cards to meet specific needs.

The number of different accounts that an “Island Approacher” uses depends on personal preference as well as spending and payment habits. In its most basic sense, however, this strategy would likely entail using a rewards credit card that offers market-best earning rates in one's everyday expense categories and a 0% credit card to manage revolving debt. Aside from access to superior terms, this strategy provides a number of useful perks. They include:

  • A better perspective on lifestyle affordability: Everyday expenses like gas and groceries shouldn't necessitate leveraging debt. The thing is, when you use the same card to make such purchases and manage debt resulting from big-ticket purchases or emergency expenses, everything gets jumbled together, making it difficult to determine what's what.

    When you isolate everyday spending on a single card, however, the presence of finance charges on that account will clearly signal the need to cut back. It will also be easier to develop a strategic payoff plan for your debt when it's not being masked by ongoing purchase amounts.

  • More favorable payment allocation: When you have multiple balances on a single credit card, only the amount you pay above the minimum required each month gets applied to the balance with the highest interest rate. When you spread things out among multiple cards, you can allocate payments at your own discretion.

  • The ability to easily take advantage of attractive new offers: It's simply harder to switch credit cards when you've got a maze of debt, rewards earnings, and automatic payment preferences to deal with. It's a lot easier to cut your ties when each of your cards is more targeted. This is especially important these days, as issuers are offering extremely lucrative sign-up deals in the form of initial rewards bonuses and 0% interest rates.

  • Enhanced Protections for Small Business Owners: This one applies mainly to small business owners because while consumer credit cards are included under the scope of the CARD Act (the landmark law that enhanced consumer rights and transparency following the Great Recession), cards branded for small business use are not. Most importantly, that means credit card companies aren't prohibited from raising interest rates on existing balances held on small business credit cards, making debt security hard to come by for those using such cards.

    But since banks hold small business owners personally liable for debt anyway and they can't increase rates for existing balances held on consumer cards unless the user is at least 60 days delinquent on payment, you can simply use a 0% consumer credit card for financing purposes and a rewards business card for everyday spending. Business credit cards tend to offer rewards more targeted to company expenses like office supplies and telecommunications services as well as enhanced expense tracking capabilities, so you don't want to forgo business cards entirely.

At the end of the day, the manner in which you approach your personal financial management depends on whether you love the aforementioned benefits or the simplicity that comes with using a single credit card more.

But either way, it's important to not only recognize how dangerous habitual overleveraging is, but also to prioritize breaking out of that cycle and paying off what you owe ahead of the promise of a free rewards vacation, if applicable.


Odysseas Papadimitriou is the CEO of CardHub.com, a leading website that helps consumers learn about, compare and find the best deals on credit cards as well as WalletHub.com, a new personal finance social network where you can compare and review financial companies, professionals, and products.

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