Tuesday, November 27, 2012

Ten Rules for Credit Cards

For many, a credit card is a necessary evil in our culture.  If you have to have a Credit Card, you have to be very careful with it!

The following are ten simple rules for having a Credit Card.  These are rules that I learned - often the hard way - over the years.  Every "mistake" I made profited VISA and MASTERCARD enormously.  But of course, these were not really "mistakes" but rather expected outcomes - the credit card companies are hoping you fall into these well-laid traps.

Anyway, here's the Rules:

1.  Lowest Interest Rate:  Get the lowest rate card possible, period.  A credit card is a debt instrument, and getting a higher rate card on the premise you will get "rewards" is nothing but a trap.  A bear trap, waiting for you to step in it.   And no, there are no exceptions to this rule, so please don't try to debate me on this.

2.  Low Balance Limit:  Pick a limit that you can realistically pay off within a month or two, based on your income level.  The credit card companies will want to offer you more than this - often $10,000, $20,000 or more (at one time, I had three cards with $20,000 limits - enough to buy a brand new BMW!).  $5,000 or less is a good idea, if you make $100,000 a year.  $2000 or less is even better, if you make $50,000 a year.  Less than $50,000 a year?  Maybe you don't need a credit card!

2.  No Annual Fee:  It goes without saying that you should not pay for the privilege of having a credit card.  They make a lot of money on your purchases - a lot.  Cards with annual fees often have bonus miles or cash back rewards.  Usually, the annual fee is equal to the reward you receive.  Just walk away from any card with an annual fee.

3.  Set up Auto Pay:  You may have to call to do this, but increasingly, Credit Card companies are offering to do this online.  If you set up autopay, the minimum payment will be made, on time, from your checking account, even if you "forget".   This is important, as the penalty for missing even one payment can be the "penalty" interest rate - often 25-30%.  They don't call it a "penalty" rate for nothing - it is like being kneecapped.

4.  Opt Out of Cash Advance: You may have to call to do this as well.   The credit card company will send you little checks, hoping you are desperate for money one month, and will cash them.  They come with the highest interest rates possible - near payday loan levels.  And if they are stolen from your mail, you will have a nightmare of a time trying to unwind it all.  Call and say, "NO" to cash advance checks.  Note that the better credit card companies do not send these at all.

5.  Opt Out of Automatic Credit Limit Increases:   You may have to call to do this as well.  You make regular payments on your credit card and they send you a letter saying "Congratulations!  We've raised your credit limit!"  This is a trap in two ways.  First, they are hoping you will spend more - spend until you are stuck with a high balance at a high rate, and no way to pay it off.  Second, by raising your credit limit, they damage your credit score (in terms of available credit) so you can't borrow from someone else.   Thus, if you later want to refinance your house or rollover your balance to a lower card, you can't - they have your credit blocked out with their high limit.

6.  Know Your Statement Date:  Mark this on your calendar, so you know when your statement comes out.  Check it carefully.  You should be checking it online (see below) anyway. 

7.  Get Your Statements Electronically:  Opt for online statements, so you don't have to worry about lost or stolen mail, or traveling.

8.  Know Your Payment Due Date:  Again, mark this on your calendar.  You need to make a payment before that date, or the "penalty" interest will kick in.  Make sure you make a payment before the due date to avoid penalties - or pay off the balance to avoid interest altogether.

9.  Pay Online:  Probably no one writes checks anymore, but a surprising number of old people tell me they like to "feel the paper check".  Bad idea.  Your check may get lost in the mail, and as a result, the "penalty" interest rate will kick in.

10.  Check Your Balance Often:  Setup your account with the Credit Card provider's website so you can log in every day and balance the account, if you want to.  Bookmark the page.  I log in to my credit card account nearly every day, check recent purchases and the overall balance, and make payments.  I never let the balance be a "surprise" at the end of the month.

* * *

This all may seem like a lot of hassle, but you have to treat a credit card like it is nitroglycerine and ready to "go off" in your wallet at any time.

No one intentionally sets out to get into Credit Card Debt.  No one says, "Gee, I think I will run up $20,000 in debts at 25% interest, that sounds swell!"

On the contrary - everyone, and I mean everyone starts off saying, "Oh, I'll just pay off the balance every month!"  But that never works out - 70% of the time, according to the Credit Card industry itself.

What happens is, people get a card, think they can "handle it" and their spending creeps up.  They start charging everything in their lives, and as a consequence, stop looking at how much things cost.   And at the end of the month, the balance due on the card is always more than they think.

"Gee, I forgot about that charge at the restaurant!" they say, and "I didn't realize I spent so much on gas!"

If you don't check the balance weekly - or more often - it can sneak up on you like that, and at the end of the month, well, you've got an unpleasant surprise:  A balance that you can't pay off in one month.

And that starts the snowball rolling.  Because you make a partial payment and promise to catch up "next month".  But next month never comes, as you can't pay that balance either.  And now interest charges are kicking in - high interest charges because you opted for "rewards" rather than a low interest rate.

There is no way to avoid personal weakness, just as there is no way to avoid economic downturns or job layoffs.   Rather than to structure your finances on best case scenarios happening, it is a better idea to structure your finances expecting bad things to happen so that your financial situation is robust.

Taking on a credit card with the idea that you will never succumb to weakness or make a mistake - ever - is just idiotic.   You are better off taking on a credit card that - in a worst case scenario - can't hurt you.
A $20,000-limit 'miles' card with a 25% interest rate and a 30% penalty rate can bankrupt you, literally.  On the other hand, a 7.15% Capital One card with a $1500 limit will do little more than nick you for a few dollars in interest.   One is a loaded handgun, the other a toy popgun.   Both are pointed at your head when they go off.

Which do you prefer?

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