Three Steps to Getting the Most from Your Credit Cards

The following is excerpted with permission from The 1-2-3 Money Plan: The Three Most Important Steps to Saving and Spending Smartby Gregory Karp.

A credit card is like a loaded handgun. It's not the tool that makes it good or bad. It's the user. That's why credit cards, as a payment method, deserve their own section in this book. They can be a convenient and even lucrative form of payment, or they can be disastrous. They are, at once, good and evil.

Maybe the single-biggest advantage to credit cards is being able to use somebody else's money—that of the bank issuing the card. Think about it. When paying with cash, checks, and debit cards, you're putting your money at risk in the transaction. With credit cards, you put the bank's money at risk. You can dispute a charge and the bank has to fight with the vendor. Meanwhile, you don't pay. If a card is stolen, you just report it. Your cash is not vulnerable.

Used well, the credit card is the only form of payment that builds your credit history so you can obtain lower rates on other products such as auto loans and insurance. Credit cards also provide rewards, such as cash, airline miles, or merchandise points. Some offer extended warranties on products purchased with the card and other perks that vary among cards.

At the same time, credit cards carry the biggest downsides of any payment method. Namely, consumers frequently spend more when they charge purchases, as we said previously, and many incur outrageous finance charges that sometimes top 30 percent. Late-payment and over-the-limit fees are also punitive. Those disadvantages, if they apply to you, dwarf any advantages of credit cards.

If you are philosophically opposed to credit cards, I have no problem with that. Don't use them. Just realize you're forgoing some convenience, consumer protections, and rewards that credit cards provide. But if you spend less as a result of using cash only, you could be adequately compensated for your philosophical stand.

Here's how to get the most out of your credit cards.

Credit Cards, 1-2-3

1. Never carry a balance.

2. Know your perks.

3. Maintain your card.

1. Never Carry a Balance

Never is a strong word. But carrying balances on credit cards from month to month is so destructive to your finances that it's worth using strong language.

For those who carry a credit card balance from month to month, credit cards can be downright evil. Interest rates can easily top 20 percent and push toward 30 percent, which is outrageous. You could be in big money trouble if you're paying only the minimum payment each month. It's wildly expensive.

So, paying high interest on credit cards, if you can possibly avoid it, is foolish. If you regularly carry balances, you have already figured that out.

Yet, nearly half of American households carry a balance from month to month, according to the Federal Reserve. You can view this statistic a couple of different ways. First, it's shameful that almost half of American households are borrowing money on their credit cards, with many paying outrageous interest rates. That's even truer if much of the balance includes dinners out, unnecessary electronic gadgets, and other highly optional charges.

The second way to look at the statistic is that half of Americans carry no balance at all. So, if you justify having a balance "because everybody does," it just ain't so.

Also, don't take comfort in reports that say the average balance on credit cards is $10,000. MSN Money columnist Liz Pulliam Weston is the foremost crusader against this so-called fact, which originates from CardWeb.com. It has been reported by the media literally hundreds of times in recent years. CardWeb.com reported that in 2007 outstanding credit card debt was $9,840 per household. Weston points out that the number only includes households that have a credit card, which eliminates from the average all those households with zero balances because they don't have cards. The stat also includes business credit cards, which can have huge balances, especially with business travel. What business credit card balances have to do with household debt, I have no idea. Just as important, it reports the total balance as a snapshot, regardless of how many of those people paid off the balance before incurring finance charges.

The point is, not everybody is carrying credit card balances, and you shouldn't either.

As I alluded to earlier, part of the reason people run balances on credit cards is because credit cards don't seem like real money. Handing over plastic to a cashier doesn't stimulate the same emotional pain as handing over a fistful of twenty-dollar bills. Indeed, studies have shown that consumers spend more with credit cards than cash, which explains the growing presence of card readers at every retail cash register. Retailers want you to overspend.

So, even people who pay off balances every month could be overspending just by virtue of the payment method they're using.

2. Know Your Perks

Despite all those negatives, credit cards have advantages—for "deadbeats." You would think credit card "deadbeats" is a term for people who don't pay their bills. But, in fact, deadbeats are what credit card companies call customers who pay off their balances each month. These customers don't pay the issuer any interest or fees. In essence, they give themselves a free ride by enjoying all the advantages of credit cards and suffering none of the downsides. Don't feel too sorry for credit card companies, though. They still make money from the merchants you buy from.

Being a credit-card deadbeat is a good thing.

One of the advantages of credit cards is they help establish and maintain your credit rating, which translates to real money. You can get less-expensive mortgages and car loans when you have a better credit rating. And you might even get cheaper auto insurance, as some insurers now use credit ratings in determining your premiums.

Another huge benefit is putting the credit card company between the merchant and your cash. That's why it's best to use a credit card for online and mail-order purchases in case a dispute arises.

Cards have many fringe benefits too. Most people overlook these perks. They include purchase protection, extended warranties, merchandise discounts, travel insurance, rental car insurance, price protection, lost luggage help, favorable exchange rates on foreign currencies, and others.

I won't go into details about these offerings because they vary by card. But make a note on your to-do list to investigate all the perks of credit cards you carry in your wallet. You can read about the benefits online at the card-issuer's Web site or call the phone number on the back of your card and ask, "What are my card perks?"

Quick Tip: Merchants can't require a minimum purchase for using a Visa or MasterCard credit card. A provision in their agreements with card companies requires them to accept charges of any amount. Of course, there's not much you can do about a merchant refusing to make a small sale, except report them to the credit card company.

3. Maintain Your Card

Maintaining your card doesn't mean keeping the card free of fingerprints or making sure the signature on the back is legible. It means continually negotiating better terms on your credit card account.

One secret of the credit card industry is this: As bad as card issuers sometimes treat their customers, they hate to lose them.

It's very expensive to acquire new customers. So, threatening to stop using the card—or better yet threatening to transfer your balances to another card—can be effective with customer service representatives on the phone.

The point is you have leverage. And you should use it at least annually to improve the terms of your deal with the bank issuing the card. This remained true, even after the credit crunch that began in 2008.

The first thing to do is ask your card issuer for a better interest rate, even if you don't carry a balance. That's because, for better or worse, credit cards are a short-term source of funds. You never know when you might have to break the cardinal rule of "never carry a balance."

Call the number on the back of the card, and just ask. If you're unsatisfied with the answer, ask for a supervisor. Still not satisfied? Call back in a few weeks and do it again. The better payment history you have, the more likely you'll succeed.

The next thing to do is call back and ask for a higher credit limit. This is a tactic discussed earlier about how to improve your credit score. Be sure to ask, "How much can you raise my limit, without pulling my credit report?" That's because an official inquiry into your credit report could temporarily lower your credit score. You're looking for something for nothing here. The point of raising your limit is to improve your credit score by lowering your ratio of credit used to your credit limit. A secondary reason for raising your limit is to avoid over-the-limit penalty fees, if you're the type of person who nearly maxes out your credit cards.

Quick Tip: Speaking of maxing out, if you're at the video store wondering which blockbuster to rent next, head over to the documentary aisle and check out the 2007 movie, Maxed Out. It's a disturbing and enlightening exposé on how credit card companies prey on the weak in society. In fact, their profits depend on it.

The final thing to ask your credit card company is for fees to be waived, even if it's your fault. If the card company hits you with a $40 late-payment fee or over-the-limit fee, call up and just ask for them to waive it. If you're a good customer and it's your first slip-up, they will almost certainly waive the fee. It's worth a phone call.

Comments

[Strick]

I don't really care about my interest rate or credit limit. Anyone tried calling Chase and ask them not to change their freedom rewards or they're leaving (not exactly an idle threat from what I've been reading)? On one hand, its probably not as simple for them to change around rewards as they do an interest rate but, on the other, this is something currently existing and people have been phased out of this a little at a time, so I don't see how its not feasible to just not phase out some people at all.

[Troy]

One thing I have always found intriguing is the connundrum, or hypocritical nature of credit card enthusiasts.

They say to never carry a balance, but instead enjoy the "perks" like convience, rewards, etc but pay off the balance every moneth to avoid interest charges.

But if people actually never carried a balance, those "perks" would dissappear. Because the profits would dissappear, or be greatly reduced.

So actually, if you are a fan of credit cards, shouldn't you be encouraging others to "rack it up." For it is those people who allow the perks for the remainder?

And an interesting point was brought up. Philisophical issues. Not philosophical as in "I don't like them, I have an aversion to debt" or other personal philosophys, but consider the "greater philosophy"

The benefits of credit cards only exist because most users don't benefit from them.

[Jeff M]

I just increased my credit limit on my Amex card from $2,000 to $5,000 without even having to talk to anyone. I made a request online that took literally 1 minute, and now my credit utilization ratio for that card is cut in half.

Now I have a high enough limit to buy a new Macbook Pro and get the extended warranty coverage Amex offers. WIN. Needless to say I have the cash to buy it and have planned the purchase months in advance.

[Tyler]

More often than not, there are three parties behind your credit card.
1 the bank that issued the card
2 the card company- visa etc
3 a third party who sits between the vendor and the bank. This is the person on the hook should you have any disputes about charges. I thought this party was very interesting when I learned about it. They get some of the transaction fee and they get to hold massive balances owed for a day or two. Very profitable unless he gets hit with major fraud.

[chasingcreditcards]

People who benefits from credit cards are people who can afford to pay for their monthly bills. For those who carry a balance it is one hell of a ride with all those late payment and interest fees. The best thing one should do is to stick to paying with cash and try to create a savings account as emergency funds and not rely to credit cards in times of need.