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Make the system work for youOct 19 '00 Write an essay on this topic.Credit cards can be a big financial help, if you know how to use them, and use them responsibly. Many people do fall into the credit card pit, paying way too much in interest every year. However, if you play the credit game right, you can manipulate the system, rather than let the system manipulate you. I was “inspired” to write this based on a review by pavlovsdog, who essentially states that credit cards are evil. I think they can be great tools. Here’s why: Credit cards can be very useful in emergencies Most financial advisors will tell you to build a cash reserve of 3-6 months salary for emergencies. It would be great if we could all do this. However, those of us who are just starting out may not have had time to accrue sufficient funds. I am paid a stipend of $1,000 a month, which is pretty tight to live on. I am very slowly accumulating some cash reserves, but for now, if an emergency should arise, I will have to rely on credit. If you do dip into your credit card account to pay for emergency spending, resolve immediately not to make any additional purchases on that card, and pay off the balance as quickly as possible. I CAN’T EMPHASIZE THIS ENOUGH: Unless you have extenuating circumstances, PAY YOUR CARD OFF EVERY MONTH. If you have to, make notations in your check register, or wherever you keep records, of how much you have purchased on credit each month. It can even be as easy as saving your receipts in a mug. Think of your credit card as an extension of your checking account. Don’t put more on your card than you have in your checking account, unless of course it’s an emergency. Many people do rationalize that they will pay their card off every month but don’t. That doesn’t mean you must fall victim to this practice! There are of course, circumstances where it’s advantageous to carry a balance. I have 3 cards, and pay 2 off at the end of every month. The third has an introductory rate on balance transfers of 2.9%. I actually do have enough to pay this card off, but why should I? I can earn 6% on a money market account at NetBank and pocket the 3% difference. Of course, I will pay this card off at the end of December, when the intro rate expires. There are occasions where it is convenient or even necessary to carry a balance for a month or two. For example, I’m on a scholarship program that pays for my books and equipment, but reimburses me after I buy them. This month, I bought a stethoscope, a diagnostic kit, and had to pay for step one of the three-step national medical licensing exam. Total amount spent: $900. I won’t see a reimbursement for that for at least 4 weeks, so I will most likely carry a balance for a month. At the beginning of this section, I said unless you have extenuating circumstances, pay your bill each month. Extenuating circumstances do not include impulse buys! If you are prone to impulse purchases, but still feel the need for a card for emergencies, consider freezing the card in a plastic cup of water. When you want to use it, you will have to take it out and let it thaw. While you wait, you will have time to think about whether you really need to make a purchase. READ THE FINE PRINT, ESPECIALLY WHEN IT COMES TO BALANCE TRANSFERS Many cards will offer a great introductory rate on balance transfers. I urge anyone to take advantage of these rates. It’s one way of manipulating the system to work for you. However, many lenders will charge a much higher rate on new purchases. Say you have a $1,000 balance transfer at 3% that you are paying down with monthly payments, meanwhile socking away another $1,000 at 6%. Good for you, you’re pocketing 3%. However, if you make a new purchase on that card, your lender may charge you a much higher rate, say 18%. No problem, you say, I’ll just pay that off at the end of the month. WRONG. Your lender will most likely apply your payment to the low-rate balance transfer, leaving the new purchase to accrue interest until you are finished paying down your balance transfer. Keep your old card, use it for purchases, and pay it off every month. Put your new, balance transfer card in the freezer if you have to! Also, make sure your lender doesn’t charge you a fee to transfer a balance. Even if they do, It may still be to your advantage to transfer a balance and pay a balance transfer fee. Read the fine print and do the math and you’ll come out on top. Carrying credit cards can be safer than carrying cash If you are carrying cash and lose it or have it stolen, you don’t have much chance of recovering your funds, although, believe it or not, homeowners or renters insurance may cover the loss. If you are instead carrying a credit card, your liability is limited to $50 if you report the loss or theft as soon as possible. I imagine there are some lenders out there who would give you a hard time about when you reported the loss and which fraudulent charges you are responsible for. Counteract this by doing some research before applying for a card. Read epinions, ask your friends, find out what companies have an established reputation of customer service. I’m partial to American Express and USAA. I’m confident that should my cards ever be stolen, I will have no problem canceling them and incur minimum responsibility for illegitimate charges. I also am confident that should a theft occur, the lenders I do business with will overnight a new card to me. Need to shop online? Rent a car/hotel? Buy a plane ticket? A debit card will do Credit cards are useful for these types of purchases, but not entirely necessary. You can quite often rent a car/hotel, buy a plane ticket or buy things online with a debit card, if it has a Visa or Mastercard logo. However, some debit cards come with low authorization limits. This means that even if you have sufficient funds in your account, your debit card will not be approved. Why? Banks often place a daily limit, such as $500, on debit card usage. This can usually be remedied with a call to your bank. Certain credit cards tout accident insurance when you use them to purchase flights or rent cars. Most people don’t need these coverages, if they have adequate life, health, and auto insurance. If it makes you feel better, though, go ahead and use your credit card to make these purchases. Just be sure to pay off your account at the end of the month. Credit cards can and do help people to establish credit While I certainly agree that people should not buy more of anything than they can afford, often, it can be advantageous to borrow to pay for your car. For example, when my parents and I bought my car, Ford was offering a $1,000 rebate or a $750 rebate with 0.9% financing. Since anyone can get 6% on a money market account at a decent bank, we can earn 5% on our money as we pay off the car. There are other things you need a good credit rating for, the most glaring example being a home purchase. How many people can save enough to pay cash for a house? While a steady job and steady income will help you to qualify for a home loan, an established record of making monthly payments (this means paying off a credit card each month) also goes a long way towards proving credit-worthiness. It is true that if you have a lot of open credit card accounts, lenders may count this against you. Why? The total of all your credit card limits represents the amount of debt you could potentially be in. If you add these to your total home loan and you get an amount of debt that you could not handle, you will see why a bank could count open credit against you. The solution? Carry one or two cards and keep the limits relatively low. Other things that good credit will help you with: apartment rental, establishing electric & gas service (without deposits), establishing phone service, getting auto insurance discounts, even qualifying for certain jobs, etc. Use credit cards to get free perks There are a wide variety of perks out there for credit card users. For example, some issuers extend warranties on items bought with certain cards. As I said before, many lenders offer extra insurance when you buy plane tickets or rent cars with your credit card. People with their finances (and insurance coverage) in order shouldn’t need these perks, but I guess they’re nice to have. Many cards offer airline miles in conjunction with purchases. If you have a high salary and are able to charge (and pay off) a large amount of purchases, these cards may be worth the annual fee they charge. Otherwise, consumers can be better off with cashback reward cards, such as those offered by Discover and American Express. Usually these don’t have fees. Use the grace period to earn some extra interest If you pay your card off each month, a good lender will give you about 25 days after the billing date to pay your bill without incurring any interest charges. If you buy something right after your last billing date, this could mean up to 55 days of an interest-free loan. Put the cash you would have used to make this purchase away in a money market account, and you can come out a dollar or two ahead. Conclusion Way too many people fall into the credit card pit. It doesn’t have to be this way. Don’t let credit card issuers or your own temptations manipulate you. Instead, let the system work for you.  |
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