What the credit card companies don’t want you to know

The following post was written by The Simple Money Blog, and I felt it was particularly relevant for the Debt Free Marriage audience. It is from a fellow personal finance blog that is coauthored by a husband (“KJ”) and wife (“AJ”). Happy reading!

creditcardsAJ: I begged Kirby to write a series on how to use credit cards to your absolute benefit, and I’m so excited about this post. Kirby is an absolute machine at navigating the positive side of credit card and bank account benefits. Heed his advice, the points and cash back benefits are well worth it!

KJ: Beware: the information contained in this post may make you suddenly generate extra cash. This sudden windfall might leave you with a strange feeling of ‘why haven’t I always done this?’

I got my first credit card in my first year of college. There were offers around every corner (something quite disgusting for college students who typically have little wherewithal or knowledge on how to properly manage a credit card), so it was (and is) important to pick a credit card that is right for your lifestyle whether that be mileage benefits, cash rewards, or other rewards programs. At the time, I didn’t even have to provide any documentation showing what my income was in order to determine how much credit I could qualify for. Why is that okay? From the get-go, many companies are setting you up for failure. Why wouldn’t a college student with little income per month not say ‘sure, I’ll take $2,000 of credit!’? ‘It’s okay, I’ll just pay it back when I get that great job’…

My view for the only way to optimally use a credit card is to use it for your regular monthly expenses, earn rewards, and pay it in full at the end of the month. If you instead add expenses and simply make the minimum monthly payment, it would take you YEARS (or even DECADES if you are adding anything to the card each month) to pay it off, and that $1,500 tv that was such a ‘steal’ could end up costing you over $2,800! Since the interest rates that most companies charge are exorbitant (the best rates can be around 9% per year while good rates can still be in the mid-teens), it’s easy to fall victim to credit card companies. Few are designed to actually help the consumer from a long-term perspective, and in fact many keep the consumer indebted for years. When used properly though, you can enhance your savings by gaining some attractive rewards.

Here are ten rules and guidelines my wife and I live by:

1) Do not get a credit card you cannot pay off regularly.

    The expenses and interest you will pay will FAR outpace the benefits you would have otherwise received no matter how enticing the card’s initial terms or rewards. Some of the best cards available for rewards I’ve found are Chase’s Freedom card for cash rewards as well as some of the Citi American Airlines cards for airline rewards. As unique as a budget, not all credit cards are for everyone, and one size does not fit all.

2) Get the card that fits your lifestyle to maximize the benefits.

    Shop ’til you drop. Not for purchases though! Do your research upfront Bankrate.com is a great resource to evaluate different credit card offers). For us, our preference is for cash rewards.

3) Save most (or all) of your rewards.

    If cash rewards are your elixir, when you come across ‘sudden’ money in the form of rewards redeemed, try saving it all (or at least save an equal amount to what you plan to spend). You didn’t have the money yesterday, and you don’t have much control of when it will hit next, so why tack it on as an increase in your lifestyle and living expenses? Once you get accustomed to a certain lifestyle, it is tremendously difficult to take a step back.

4) Stick to your guns.

    If you open a credit card for the rewards, and you plan to close it after the initial teaser reward, then stick to your guns. Pay attention to minimum holding periods (six months for some cards) where the rewards are eliminated if closed within that period of time. This is particularly important for some of the glamorous first time card offers. Especially with some of the bonus airline mileage cards, they have a fee after the first year of the card, which may make the card become unattractive after the grace period.

5) Credit is better than debit.(1)

    Compared to the debit card counterparts, you often have more protection against wrongful purchases and product returns in the event that something doesn’t work as the merchant promised.

6) Find ‘foreign travel’ friendly cards for out of country visits.

    Certain credit cards are ‘foreign travel’ friendly with minimum transaction costs and exchange rate fees. In my experience, Schwab and Capital One have been good companies for travel protection, access, low fees, etc. especially since they both typically reimburse all ATM fees. If you’re traveling out of the country, be mindful of charges for foreign transaction fees and conversion charges. Foreigners are particularly susceptible to identity theft/fraud, and watching your accounts regularly to see if something crops up is important.

7) Cash advances can be dangerous.

    They start charging you interest from the day you take the cash out. As such, use only as a last resort!

8) Try something new: LOWER your credit limit.

    Contact the credit card companies to reduce your available credit amount. Hear a pause at the end of the phone followed by a ‘what is that you say?’ and you will know it’s not a common question they receive. It’s so easy to fall into a trap of having several credit cards: the access to a higher credit limit and other rewards can be intriguing, but it can get you into trouble. If you reduce your credit available, you will have to rely more and more on your personal savings and cash before making a large purchase, but you will find yourself in a much stronger financial position long-term. Our grandparents used to pay for everything with cash (cars, larger down payments on a home, appliances, furniture, etc.), so why not bring cash back into style?

9) Do the math.

    If you are applying for a card with an annual fee, calculate if the rewards for what you regularly purchase more than offset the annual fee compared to other rewards cards. In order for the math to work, sometimes it entails increasing your expenses to make the rewards worthwhile, and that’s precisely the last thing you should do!

10) Easy isn’t always better.

    Credit cards make access to money easy, but when was the last time the easy route was the best route?

The methods outlined above are really only feasible if you have a good handle on what your income AND expenses are each month (see also our relevant posts: How to build a budget and Budgeting: a very good place to start). Then, you really KNOW what you can and cannot afford. Follow the steps of:

      (1) establish an emergency fund,
      (2) eliminate credit card debt, and
      (3) begin saving for your future goals (vacation or retirement).

You will find you are in a much better position to handle the unexpected that invariably comes up.

For some additional references with comparisons of credit cards versus debit cards:
(1) http://www.cbsnews.com/8301-505146_162-57365965/4-reasons-to-use-credit-cards-versus-debit-cards/
(1) http://www.fdic.gov/consumers/consumer/news/cnfall09/debit_vs_credit.html

The above post was republished with consent by DebtFreeMarriage.org from TheSimplemoneyBlog.com.

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Why do Credit Cards Cost More than Bank Loans? [Podcast]

Suppose I have an $8000 credit card and an $8000 bank loan. They both have the same interest rate of 14.4% AND they both have the same payment of $220.

You would think that these two loans would get paid off at the same time, but that would be very wrong.

By the time you pay of Credit Card, you’ll have spent $3300 more in interest than you would have using the bank loan.

WHY IS THAT?

- Is it because credit cards are more convenient?
- Is it because credit cards are revolving loans?

So lets explore…

Most people are aware that when you take the more convenient choice… you pay more. It’s more convenient to go to a gas station than it is to visit the grocery store, but the prices are almost double for the items there. Whenever you shorten the length of time to do something, you pay a premium to do so.

So what makes a credit card more convenient than a bank loan? Well… it’s an easier application process for one. You fill out a pamphlet and give it to the bank teller, or you do it all online. Then you get your answer in the mail. Applying for a bank loan is not convenient at all. You have to go to the bank and sit with the loan officer and if feels like begging.

With a bank loan, once you pay it down, you can’t just borrow more money unless you go through the loan process again to get another loan. With a credit card on the other hand, you can pay it down and charge it up again without every having to apply.

This is called revolving credit. You can pay down and charge up your credit line. You can borrow, repay, borrow again, and repay as often as you like without the hassle of creating new paperwork. Revolving credit is a cool idea and it’s a convenient idea, but it is a COSTLY idea!

Here’s why:

A bank loan has a fixed payment schedule. In the case of the loan above, an $8000 balance will take 48 months to payoff with a payment of $220 and an interest rate of 14.4%.

The credit card with the same numbers will have a payment of $220 as well, but ONLY for the first month! The second bill has a payment of $217 and the third bill has a payment of $214.

It’s called a Decreasing Minimum Payment. Because you pay less and less each month, it takes you longer to pay off the bill AND it costs you more money in all. In fact, this loan will take 202 months to pay off and costs $3300 more in interest charges. This is true even if you are never late and interest rates never go up.

This is a big problem with an easy solution. You can pay off a credit card just as if it was a bank loan simply by keeping your payments the same each month. Whatever you are paying today, just keep paying it until your balance is $0. It helps to pay more when you can… but definitely DO NOT just pay the minimum payment they send you. Minimum payments are ineffective and do not put a dent into your balance.

With this strategy, you can pay off your credit cards faster and save a lot of money.

For a more comprehensive look at this subject please check out this report:
Credit Card vs. Bank Loan

Also… the strategies listed in this article and in the report are just a FEW of the strategies included in the Debt Elimination Engine found here:
www.DebtFreeInnerCircle.com

And finally… here is my Debut Podcast on iTunes. Feel free to comment below.

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The “Debt” Problem – and a Strong Message

I’ve been doing a lot of reading lately about the current financial situation our country faces.  The Debt Ceiling, our rising national debt, unemployment rates, and more all are very important issues right now.  As Americans today, we didn’t create these problems… they were made LONG ago by generations before us… and it seems they will remain next generation to handle as well.  This 30 minute video explains more.

So what does this mean to you?

Can you solve the nation’s debt problem?  Can I solve the nation’s debt problem?

Unfortunately the problem is much bigger that we think and you and I cannot do a thing on our own to solve the nation’s fiscal problems.

There needs to be a EXTREMELY STRONG MESSAGE that will reach all Americans:

You are a Part of the Solution

Here’s the thing… our Government, just like most American’s today, have maxed out their credit cards.  The only way the problem will be solved is by either increasing income and cut spending.  Our Government will eventually have to do BOTH.

What does this mean to you?

You will see prices rise, you will see taxes rise, you will see interest rates on loans rise.  But you will not see your income rise in the same rate.  You will feel the SQUEEZE of the Government correcting a problem it should have corrected long ago.

It’s coming folks..  if not for us… for our children.

I don’t say this to be all doom and gloom.  I’m telling you this so that you can do something about it now for you and your children.

You MUST do the following:

- Get out of ALL debt, including your mortgage.  Pay it all off and OWN it all.

- Live on CASH.  Debit cards are fine,  Credit cards are not.

- SAVE in your emergency fund to protect you from job loss.

- Invest your money to build personal wealth

 

I realize that this is a simplistic view of what needs to be done..  but I can tell you that only 4% of Americans are actually doing this.  The other 96% are spending way beyond their means with credit.

If every American got themselves out of debt.. and started saving again, the nation might have a chance.  Unfortunately that is only wishful thinking on my part.  The only thing I can do right now is to tell you how to get there yourself.  The government is going to solve it’s fiscal problem whether you were part of the solution or not.  If you don’t start getting yourself out of debt right now…you will eventually live a substandard life because you’ll be owing 75% of your income to taxes and interest.

I’m not crying wolf here.  Others have been there and done that.

 

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