Monday, August 4, 2008

Credit Cards 101

Credit cards are either the bane of your existence or a small but important part of your financial life. Either way, it is virtually impossible to live without them in our high-tech society. In order to keep yourself ready for anything (ie: not deep in credit debt when a disaster strikes and you need to be financially solvent), follow these simple rules:

  • Don’t have more than four or five credit cards. Keeping track of a dozen cards is difficult and if you are prone to over spending with your credit cards, having a handful of them could lead to disaster.
  • Keep track of the credit cards you have. For each credit card, write down the name, account number, mailing address, 1-800 contact number, contact number if you are traveling overseas (it will not be a 1-800 number), the payment due date, and the credit limit.
  • Try to use only one credit card each month and pay it in full each month.
  • If you do have balances on, for instance, four different credit cards, make a plan to pay them off ASAP. Some people will pay off the card with the smallest balance first then move on to the next highest balance, while others will payoff the card with the highest interest rate first.
  • For your cards that carry a balance, review your statements thoroughly. Your statement should tell you the credit limit, the interest rate, and any additional fees assessed (over limit fees, late fees, etc).
  • For your cards with high interest rates, call the company directly and asked to have the rate lowered. Many companies will do this for you if you ask. Speak to a supervisor if necessary.
  • For cards with annual service fees, once again call the company directly and ask to have the fee waived. Many companies will do this for you, but again you may need to talk to a supervisor.
  • Realize that one late payment can raise the interest on ALL of your cards to the maximum level. Often buried in the fine print, the Universal Default agreement that you made with the company allows all companies to raise your interest rate if you are only late on one payment for one card.
  • Realize that the interest rate you pay for purchases is usually lower than the rate you will pay for credit card cash advances. Also, cash advances often incur additional fees in addition to the higher interest rate.
  • If you cannot control your credit card spending, quit cold turkey. Do not take the cards shopping with you. Do freeze them in a block in your freezer so that you will have time to think about your decision to use them while they are defrosting.
  • If you are relying on credit cards to pay for your living expenses, that’s a sure sign that you need to earn more income or cut expenses. Credit cards, in this situation are a temporary solution to a long-term problem. If you can’t pay your basic bills then you really won’t be able to pay the basics plus your credit card bills so nip this problem in the bud immediately.
  • If you do use credit cards responsibly, make sure you are getting more bang for your (charged) buck. Cards that give you rewards, a financial incentive, or frequent flyer miles are better than cards that give you nothing in return.
  • Analyze the offers that your credit card company sends you with a critical eye. Credit card spending is down recently so all of the sudden, companies start sending out “blank checks” that allow you to withdraw funds from your credit cards. Good idea to use these checks if they have a low interest rate to consolidate other credit card bills onto one bill. Bad idea to use them to buy the big screen TV you always wanted.

The bottom line is that credit card responsibility lies with the consumer. The credit companies are doing everything they can to keep you in debt and paying them interest. It’s your job to beat them at their own game by using common sense when using your credit cards, keeping strict control over your spending habits with the cards, and paying off your debts as soon as possible. Besides, you will want to have large credit lines available on these cards, if, for example, you end up evacuating from your home and staying in a hotel for a number of days, you need to leave the country at a moment's notice and need a way to pay for it, or any other true emergency that pops up.


  1. I find that a simple debit card tied to my checking account is all that is needed. Never had a credit card, never will. If I do not have the money for something I want, I just wait until I do. Living debt free makes you free. It is the smart way to go.

  2. I do not use credit cards (with a few exceptions). They are good for making some purchases because of the protections that come with them. Also having a credit card is priceless for emergencies. It might be a major vehicle breakdown 500 miles from home or Katrina but sometimes we can need a good amount of cash fast.

    Some people use them often and pay the bill diligently at the end of the month without exception and like the convenience of just paying one bill (or the airline miles, etc). I remember having a discussion with my Step Mom about that stuff once and her dad hated credit cards while her mom always had one. The rule was "if she couldn't pay the bill at the end of the month they cut the card up".