Playing the credit card game? Are they traps or tools?
I’ve been there before and I imagine if you own a credit card you’ve been there too. Here’s what happens, you get your credit card statement in the mail and to your surprise (usually after the holidays or vacation) you find the finance charges (the interest you pay) are almost equal to the minimum payment you are required to make. It’s a shock that most of us have to deal with and at the same time, it makes me sick to see how much money is flying out the window.
Next comes the frustration and as it sets in you come to the realization that if you make the minimum payment you may never pay off your debt. That’s exactly what the credit card companies want you to think. They want you to give up and lose the credit card game. This is how they win. Their dream situation would be for you to always carry a balance, preferably close to your limit, and almost always pay on time. This way they can get the max amount of interest from you and an additional bonus of a late charge or over the limit charge.
Now is the time to change and turn the credit card game in your favor. For decades, credit card companies have been preying on consumers and taking advantage of them. It’s time to learn how to take advantage of the tools they offer and become one of the few who profit and benefit from using a credit card. It’s time to win the credit card game.
Many see credit cards at traps that put you in debt. Many well known personal finance guys even recommend that you never get a credit card. I look at it a little differently though. Credit cards have great tools to offer the savvy consumer. Let’s take a look at how to use things like online payment programs, cashback programs, balance transfer programs, and other rewards programs you can benefit from. Be careful with these because they can also be the trap.
Do a Balance Transfer to get a lower rate.
If you have a card with a balance, the first order of business is to make sure you have the lowest rate possible. Most credit card companies play the credit card game when they offer an introductory rate or even a very low fixed balance transfer rate. They prey on the consumer calculating the probability that you’ll carry your balance past that introductory rate period so they can cash in on the standard rate afterward, which is a win for them. Often the rate goes from 0% to something over 16% and even higher. If you are not already at 0% check to see if a balance transfer is available with your credit card company. You may need to get a new card to take advantage of the rate.
Careful though, if you want to win the credit card game, never transfer a balance to a card that already has a balance. Most credit card companies apply your payment to the balance transfer part of the balance first, leaving the higher interest-bearing part of the balance to continue to accrue and compound at the higher rate, sometimes over 20%! If you do not already have a card available you can find a great balance transfer offers all the time. Also, to make sure you do this right, check out our article on balance transfers.
Man vs machine, set up automatic payments.
Once you have your balance at a reasonable rate you should set up an automatic payment to make sure you always keep current. One of the biggest money-makers for credit card companies is the late charge. It can be as high as $39 each month. This is huge for card companies. Imagine, a credit card company can easily have 10 million customers. If 10% of those made a late payment each month that would be $39 million that the card company earns each month. Anyway, you get the idea, the credit card company will definitely get their money not to mention they will not hesitate you raise your rate as fast as they can.
Trust me, I have personal some experience with this one and I was only a week late. It wasn’t even long enough to affect my credit, but the card issuer raised my rate to 24.9%. Luckily, I was able to immediately transfer the balance to another card at 3.9%. Lesson learned! Always set up an automatic payment, it’s like putting another player on your team to help you win the credit card game.
Most companies will let you set up a payment online and you can schedule your monthly payment to happen automatically. If you carry a balance, at least set up the minimum payment, but if you can pay the entire balance each month, then do it! Either way, you will avoid the late charge and the costly penalties that come with it.
Saving is earning, the highest Guaranteed rate of return you’ll ever have.
Think of it this way, is there any investment you can think of that will give you a guaranteed rate of return? I can only think of a few, CDs at banks, maybe an annuity (but at a high price), or maybe some government bonds. Do you think any of those will pay as high a rate as you are paying on your credit card?
The average rate most people pay is somewhere between 12 and 18 percent. You should know the interest rate on all of your cards and if you have to use one and carry a balance, use the one with the lowest rate. If you pay down your balance you are guaranteeing your rate of that 12 to 18 percent you would have had to pay. It’s money that you just lose if you try and save it somewhere else without taking a lot of risks. Each time you make an additional payment on the principal you are putting that 18% back into your own pocket.
Show me the money!
Who says you can’t have your cake and eat it too? After mastering the basics of credit cards it time to maximize the benefits. It’s almost unheard of to have a credit card that does not offer some type of reward. American Express and Discover are famous for their cashback rewards. Citi and Chase have excellent point systems to earn gift cards, travel vouchers, electronics and almost anything else you may want. There are also rewards cards to help you earn benefits for specific brands like the visa Disney credit card.
Which ones are best for you? Well, like with most things the answer is it depends. If you travel extensively, you would probably want one that pays extra points or rewards for airlines and hotels. If you spend a lot of time driving you would want to get a card that pays extra rewards for buying gas. If you look around you can find cards that even give extra rewards for shopping at grocery stores. Play your cards right and you’ll be winning the credit card game in no time.