At a time when it’s almost fashionable to hate credit cards, Randy Gardner goes against the grain. He loves them.
“I use them for virtually everything,” said the tax expert and co-director of the certified financial planning program at the University of Missouri-Kansas City. “You can’t get by without credit cards.”
Wait a minute. Aren’t credit counselors these days telling folks to torch their cards and use cash? Not really, Gardner said.
“The credit card is a usefull tool,” he said.
“The typical hit against credit cards is don’t use them unless your have to. But in my opinion, it’s easier to track your spending on a credit card than it is with cash or checks.
“The key is simply to be disciplined enough to not buy things you don’t need and to pay off your card each month.”
Gardner practices what he preaches. In January he and wife Laura and two of their four children vacationed in Florida. “From the second we left the house we put everything on our card, from filling the car with gas, to buying tickets and meals at Disney World.” Even grocery items ended up on the card.
Gardner and his wife had a plac. So when they returned home, they paid off the entire debt from a savings account. As a result, they not only had the convenience of a card, but also a 25-day grace period–a time of free cash. And, best of all, they never paid a cent of interest to the card issuer.
Credit cards certainly have a downside. Consumers can certainly sink into debt. But consumers can win by knowing the risks, reading the fine print and exercising self-control. Savvy consumers can even gain rewards such as frequent-flier miles and cash rebates. The Gardners reflect 42 percent of card users who are winning at the credit-card game. They use their cards for the convenience of buying now and paying later, but never go into debt.
Experts say that with banks hungry for customers, now is a good time to pay off old balances or nab a new low-interest credit card. What follows is a practical guide, culled from banking, legal and consumer sources, to choosing and using a credit card, and avoiding the traps.
From the start, choose a card that’s right for you. Lots of card offers sound alike. They make it appear you can save money by spending money. They even give you checks to allow you to go into debt more quickly. Only by reading the small print will you know if the card is a good deal.
Be picky. Rarely does anyone need more than one card, said Gary Klein, staff attorney with the National Consumer Law Center. Lenders are looking for people who run up balances, because they pay the most interest.
While a low interest rate is an advantage, it’s especially important if you are likely to carry a balance. Any card interest rate is high compared with most loans, and they are all subject to change. Annual fees, late charges and product fees can add more to the cost.
Look beyond the promotional teaser rates. “They’re like dangling a carrot in your face,” said Howard Dvorkin, the executive director of Consolidated Credit Counseling Services Inc. of Fort Lauderdale. They’re meant to grab your attention. But they can jump from 1.9 percent to 19.9 percent in three months.
It’s best to consider the long-term rate. And there are basically two different kinds that need to be understood.
A variable rate is tied to the performance of an economic indicator. While it might start low, it can rise quickly and steeply. By law, the card issuer must inform you upfront that the rate can change almost monthly.
A fixed interest rate can provide more stability. But don’t be fooled by the name. Fixed does not mean permanent. Fixed interest rates are usually tied to the prime rate and are also subject to change. The difference is that the credit card issuer has to give you 15 days’ notice before increasing your rate.
Because there are so many low teaser rates right now, many consumers are tempted to surf for the best deal. Grabbing a good rate and paying off high-rate balances can be smart. But juggling cards to take advantage of teaser rates and balance transfer options can be hazardous, said Klein, co-author of “Surviving Debt.”
All teaser rates, he said, are designed to lock you into “the higher rate for the long term.”
And there are lots of hidden costs. Most banks charge transfer fees when you move a balance from one card to another, and interest charges begin running immediately. The grace period doesn’t apply.
And those personalized letters? The issuers don’t really know you. They bought your name off a list of potentially good credit risks.
For example, the offer letter may say you were “pre-approved for a credit limit up to $5,000,” but you’re not. Pre-approved only means you fit a profile provided by a credit bureau. And the words “up to” can mean whatever the card issuer wants them to mean. After the card issuer reviews your application, it may say your credit report justifies only a $500 credit limit.
Billing cycles are also potential traps. If you expect to pay off the balance each month, make sure your card provides a grace period. And know how long it is. Some card issuers have shortened these periods to as few as 20 days. Some issuers send bills late. Banks are required to give you at least 14 days’ notice of your bill, but that isn’t a lot of time to get your payment in.
Most cards use a one-month cycle to calculate interest on a card’s average daily balance. But some cards use a two-billing cycle, which typically squeezes even higher finance charges out of your balances. Under this method, a bank can go back two months to calculate interest on a bill. It can, in effect, wipe out the grace period for borrowers who carry a balance, according to Bankrate.com, an Internet site that monitors credit cards.
Most experts say consumers should never spend more than they can pay off each month. But they disagree on what limits should be placed on purchases. Some say to avoid buying disposable items, such as gas and food, because they are used up before you can pay for them. But other experts say savvy consumers can best track their spending by putting everything on their card.
They all agree, however, that if you find yourself revolving your debts from one month to another, always repay more than the minimum. Paying only the minimum is the fastest way to get mired in debt.
Ed Mierzwinski, executive director of the U.S. Public Interest Research Group, calls it the “minimum payment hustle.” Most card issuers let customers repay their loans at a minimum monthly rate of about 1.5 percent. At that rate, a consumer would never pay off a $500 loan borrowed at 18 percent interest.
Mierzwinski also warns consumers to avoid special services that card issuers offer, such as purchase clubs, travel plans and life insurance, which result in fees that increase the balance owed on your card and generate interest charges. Most of these services, especially life insurance, can be obtained elsewhere at cheaper rates.
Most fee-based services only benefit the card companies. But some programs reward customers for using their cards with free travel and discounts at hotels.
Robert McKinley, chief executive of CardWeb.com Inc., which covers the card industry, said many of the cards that provide bonuses of frequent-flier mileage carried fees of anywhere from $50 to $150.
“If someone doesn’t travel frequently, it’s not a good deal. But if you travel a lot, as I do, you can’t beat those cards. I literally save thousands of dollars,” said McKinley, who pays off his balance every month.
Finally, read the card contract carefully, even though you may need an accounting degree to understand the dense language written in microscopic type. If you don’t understand the provisions, seek advice, call the lender or just refuse the offer.
Don’t fret. There’ll be another offer in the mail next week.
