The familiar first words of the credit card offer. If you’re over 18, chances are you’ve had your share of the nearly 3 billion pieces of direct mail sent out each year to possible credit card customers. Credit card companies want you, and they want to get you early, while you’re still in college if possible. They know, chances are, you’ll be loyal to your first credit card brand—and that means a lifetime customer for them.
Unfortunately, too many relationships with credit card companies turn out to be one-sided. They make all the money. You end up it debt. Big time debt. Debt that you can’t seem to get out of. One out of five college students owe $10,000 in credit card debt by graduation, and they think they’ll pay it off when they get a full-time job. But life isn’t any easier in the working world, and many times that debt only gets bigger.
But if you know the credit card game, there are ways to make credit cards work for you. Believe it or not, the credit card company and you can have an equitable business relationship in which both partners benefit (if you can resist a little temptation and use a little finance savvy).
First, always, always, always think of your credit card bill as a full-fledged bill and not an invitation to pay the minimum payment. Think of it like your phone bill or your electric bill and pay it in full every month. Every time. No exceptions. Ever.
If that advice is too late for you, and you’ve already run up a healthy credit card balance, you may consider taking out a bank loan to start with a clean slate. There are a couple of advantages to this. First, it can be hard to pay off the credit card debt when it’s still on the card because chances are you’ll still want to use the card, so it can end up being a two-step forward three-step back process.
Second, you can often get a personal loan at the same or lower rates than you are currently paying on your credit cards, and banks will usually force you into a shorter pay-off period than the minimum credit card payments would have allowed. That means less total interest in the end. The bank loan is also harder to put off. They’ll want their money every month, so make sure it’s a monthly payment you are committed to make.
Now that you have a credit card with a zero balance, what do you do with it? Some people will suggest cutting it up, but (as we all know) credit cards can be incredibly useful. They make many things in life easier: hotel and flight reservations, concert ticket purchases, online purchases, registering for classes, even starting a tab at a bar.
On top of that, proper use of credit cards can help your credit rating. It takes credit to earn credit. It’s one of life’s great catch 22’s. Using your credit cards is good for your credit. Creating credit card debt is not. So, use your credit cards only for purchases where using a credit card will make your life significantly easier (not because you don’t have the money in the bank). Never buy anything with the idea that you’ll “pay it off in a few months,” and avoid using the credit card frequently for small purchases when you could just as easily use cash. Small purchases tend to sneak up on you on the end-of-the month statement. And always, always, always pay your balance in full every month.
When you start using credit cards wisely, credit cards companies don’t take long to catch on. You’ll soon be inundated with offers: low balance transfer rates, credit card insurance, identity theft protection, 0% introductory rates, cash back, airline points, the list goes on and on.
The marketing glitz can be blinding enough that you miss the catch on some of these. Here are some things to watch out for:
Low Balance Transfer Rates. Who doesn’t want to pay 0% or 2% or 3% interest for a few months when currently you are paying 12% or 15% or 20%? What could possibly be wrong with that? The trick is: they tell you about the transfer rate, but they don’t tell you that lower rates on your card will always be paid off first. So, you’ll always pay off the higher interest rates before you can start paying off the lower balance transfer interest. This can end up as a bad deal in the end, but not always. It pays to use a calculator and do the math. There is a useful Credit Card Debt Calculator at BankRate.Com.
Low Introductory Rates. These aren’t necessarily a bad thing, but don’t get sucked into every offer that comes your way. You don’t need 20 major credit cards in your wallet. And don’t let them fool you with the “limited time offer” gig. Don’t worry, you’ll get another offer just like it next week.
If you are considering getting a credit card with a low introductory rate, make sure that it is a credit card that has long term features and benefits that you will be happy with (no annual fees, no cancellation fees, low long-term interest rates). Check the rate that you’ll be getting after the low balance transfer rate, and make sure that it’s reasonably low and that they won’t “change their mind” about your rates later.
Cash Back, Airline Miles and Other Incentives. Picking a card with a good incentive can be wise, if you don’t let the incentive inspire you to charge more than you usually would. And if you always pay off your credit card in full every month (starting to see a pattern here?), you can earn free flights, gasoline or gift certificates. Remember, credit card companies make money from the retailers that you buy from, so they can afford to give you free stuff.
Credit Card Insurance and Identity Theft Protection. In general, these are rip offs. They’re a way for credit card companies to squeeze extra dollars out of you on plans that you will probably never need (and even if you do, probably won’t be worth what you paid for them).
If you understand how to use credit cards, they can be useful tools for establishing credit and simplifying payment processes. If you don’t, and if you don’t remember to pay them off in full every month, they can become a debt nightmare.
© 2008 AmericanCreditFoundation.org®. Michael G. Peterson is a co-founder and Spokesman of American Credit Foundation, an IRS 501 (c)(3) non-profit consumer credit counseling organization that has assisted thousands of individuals and families with their financial situations through seminars, education, counseling services, and, debt management plans. For more information, and free consumer resources visit www.americancreditfoundation.org
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