When used wisely, credit cards can be our friends
Posted on August 23, 2007
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A lot of consumer advocates treat credit cards as if they’re dirty, vile things. When you’re in a financial pinch, it’s good to have a quick, easy way out. But even when the situation isn’t dire, credit cards can be used to your benefit.
As someone who’s had rocky as well as stable relationships with credit, I’ve learned how to use credit cards so that they benefit me. Most card issuers offer perks, but it’s important to not get shortsighted by the freebies. You can end up paying more for a “complimentary” item than if you’d just purchased it outright.
An example I’d been bragging about involves a department store card.
My husband’s cousin got married last month, and she was registered at Macy’s. As a cardholder, I get the sale flyers about once or twice a week. I usually look through the ads, but most of the time there’s not a lot that I need. There are plenty of things that I want, though.
That’s the tough part of having a credit card at a store like that. Back in the day, I would have done some major damage just about every weekend. And I would have regretted it every month when the bill came.
This time, though, I took the coupons and the ad and looked up what she had on her bridal registry. As luck would have it, her everyday dishes were on sale. I found an $80 serving bowl that was half price, with an additional 10 percent off because I used my credit card.
The flyer had advertised a toaster oven that retailed for $60 but was on sale for $29.99. However, cardholders saved an additional $10. I argued that I’d save energy by cooking pot pies and frozen pastries in something smaller than the built-in oven.
And finally, my everyday glassware had dwindled down to three tall glasses and about six short ones. With two boys younger than 10 years old, I’m lucky to have even that many.
A nice, solid set of 16 glasses, eight tall and eight short, was marked down from $39.99 to $29.99. And again, my credit card membership allowed me to save an additional $10.
But wait, there’s more.
I had a coupon issued only to cardholders that allowed me to take $25 off a purchase of $75 or more. Even with my discounts, I had spent $76.
But wait, there’s more.
One of the perks of my card is that I get money back for dollars spent. Just a few weeks prior, I’d received a gift certificate for $25. Naturally, I applied that to my purchases.
But wait, there’s more.
Cousin Michelle lives in Atlanta, so we had her gift wrapped and shipped to her through the store. Another perk of my card membership is that I get 12 “services” free each year.
Normally the shipping would have cost around $15 and the gift wrap around $9.
After taxes, I spent around $30 for more than $200 worth of goods and services. Sweet!
However, to make sure I didn’t end up paying for those purchases well into the next year, I paid off the credit card balance when I got the bill.
Getting that kind of bargain makes having a credit card an asset. I don’t make out that well every time. But after a lot of trial and error, I’ve learned a few things:
Consolidate trips when you can. Even a trip to Wal-Mart for fish food would cost $100 because we’d find at least a dozen other items before we got to the back of the store.
Make sure the purchase is a need, not a want. A general rule of thumb is wait two weeks before buying something that would have been an impulse purchase. If you forget about it, you probably didn’t need it.
Save your receipts. If you get home and suffer “buyer’s remorse,” cure yourself by taking the items back. My sister is the queen of returns. However, I think she does that as an excuse to go shopping again.
More credit card advice
The Federal Deposit Insurance Corp. issued a collection of 51 simple, practical tips that can help consumers save hundreds, if not thousands, of dollars on loans and credit cards. The advice is in a special edition of the agency’s quarterly, “FDIC Consumer News.”
One section, “Taking Charge of Your Credit Cards,” deals exclusively with plastic.
Here are some suggestions:
When choosing a credit card, ask yourself if you plan to pay the balance in full each month. Many people don’t pay their bill each month, they always carry a balance and pay interest on it. Yet many of these same people sign up for a card because it has no annual fee, without considering the benefits of a card with a lower interest rate or a more generous grace period (before interest begins accumulating). In the long run, a card that doesn’t charge an annual fee could end up costing you far more in interest than a card that charges an annual fee.
Read and save the “disclosures” describing a card’s features and fees so you know how to save money. “When it comes to information about the terms of your credit card, be a pack rat,” said Janet Kincaid, FDIC senior consumer affairs officer.
Key information to look for and keep: What is the interest rate, and how can it change? Is there an annual fee? What about charges for late payments, returned checks, balance transfers or exceeding your credit limit? What’s the cost of a cash advance or one of the blank “convenience checks” sent with monthly statements?
Your credit card might automatically include, at no extra charge, extended warranties on purchases and insurance for car rentals. Your card also might offer cash back on purchases, rewards good for airline travel or products and services, and various other extras. Also be aware of the rules governing these perks because limitations, fees and deadlines might greatly reduce their value.
Be especially aware of your card issuer’s billing practices, which can significantly affect your costs. How your card company treats the balances on which you are charged interest can be critical. Here are examples of potentially high-cost practices that many people don’t know about even though card issuers must disclose them:
Two-cycle billing: This billing practice is rare but is used by some card issuers. Practices vary, but in general, if you pay your credit card bill in full one month but then only pay a portion of the bill the next month, your interest charges ultimately will be based on two months’ of card charges and not one. This might result in you paying more in interest charges than you would under the more common one-cycle billing method. To find out if your card is subject to two-cycle billing, review the cardholder agreement and disclosures from your lender, or call their customer service number.
Payment allocation: This involves cards with multi-tiered interest rates. For example, there may be a low rate on a balance transferred from another card, a higher rate on new purchases, and an even higher rate on a cash advance. If you pay only part of your monthly bill, card companies typically will apply your payment to the balance with the lowest interest rate first, while the highest-rate balance continues to run up interest costs until you pay the entire balance.
Universal default: This happens when a card issuer increases a customer’s interest rate because he or she made late payments to other lenders or had an overall decline in a credit score – even if that customer paid the card bill in full and on time. While this once-common practice is rare, be aware that it could be used.
Know your credit limit, and stay below it. There are two problems with going over your card’s credit limit. One is that your card issuer will charge you a penalty, which can be expensive, typically about $30 for each instance. Also, exceeding your credit limit might damage your credit score, which could mean higher interest rates, now and in the future.
To be confident you are within your credit limit, Kincaid recommends the following: “Periodically check your balance by phone or online to make sure you stay within your limit,” she said. “Also give yourself an extra cushion – either try not to get too close to your credit limit or call the card company to get a higher limit if you anticipate a special need, such as a vacation or major purchase.”