Pick a card - but not just any card
By Don Kuehn
It is virtually impossible in today’s economy to function without a ready source of instant credit. But the card you choose, and the way you use it, can make a huge difference in your financial well-being.
I am no fan of credit cards. I regularly caution against accumulating balances, paying needless interest and penalties, and shelling out for annual fees.
I bet I get a dozen mail offers for credit cards in a given week. And I’m sure you’re no different. They come with teaser rates that usually end after six months, “pre-approved” credit lines, balance transfer promotions to get you to move your debt from one card to another, and free airline tickets—among other offers. Read the fine print. The lowest rates are usually available only to people with credit scores above 780 or so.
Here’s my first tip: When you get those mailings, shred them. Tear them up so no “dumpster diver” can apply for credit in your name. Those unsolicited mass mailings are probably not for cards that are best suited to your needs anyway. You need to find a card that matches the way you use credit.
If you haven’t been able to dig out from under your current debt load and you carry a balance from month to month, you’ll want to minimize your finance charges. That means shopping around for the lowest APR (annual percentage rate) you can find. Two ways to do that: Ask your current company to lower your interest rate, or get a new card.
You might be surprised at how easy it is to talk your current card company into lowering your rate. Call them. Tell them you have an offer from another company at a lower rate. If you don’t get the results you want, say goodbye and go to option two—the new card.
It’s okay to pay a small annual fee if you carry a balance, because cards with fees usually carry lower rates. But be careful, just because you get a low rate, don’t lose your mind and start taking cash advances, missing payment deadlines or exceeding your credit limit. Your rate will shoot up like fireworks on the Fourth of July. Your rate also can go up if you miss a payment on another card!
If you pay your balance in full every month (as 40 percent of Americans do), look for a card with no annual fee and a long grace period (the time between statement date and due date). Most cards allow 20 days, but there are a few out there that give you 25 days to pay.
You also can avoid late payment fees by paying online. Experts claim that it is as safe as paying by mail, and you save time as well as the cost of a stamp. Online payments made before 3 p.m. are usually credited the same day.
As many as 60 percent of the cards marketed today have some kind of “reward” attached to them. Two problems: Rewards cards carry higher interest rates, and people tend to use them more. It can be an addiction. I have heard stories of people charging the purchase of an automobile, or even groceries, on their credit cards just to rack up bonus points.
People spend more to get the most out of the rewards offered, but—if you carry a balance—you can dig yourself a mighty deep hole just to get an airline ticket or a discount at your favorite store. If you pay off the balance and stick to your budget, a rewards card can be a good choice.
Cards that offer cash rebates typically return only about 1 percent of what you charge. That’s a paltry $50 on purchases of $5,000. A card with an annual fee could easily wipe that out, so if cash rebates are what you want, look for a card with no fee.
Some cards direct cash awards to a college fund or to a special savings account. One card rounds off your purchases to the next dollar and sweeps the difference into a rebate fund. But again, read the fine print, because some of these cards cap their rebates at as little as $300 a year.
For more information, including consumer discussion boards, on various kinds of credit cards—cards for students, cards for those with bad credit, cards without a fee, cards offering rewards, airline cards and more—take a look at http://www.cardratings.com/ or www.bankrate.com.
Then there is the decision that leads to a lot of discussion at my house—debit vs. credit cards. Debit cards tap directly into your checking account, so they are just another form of writing a check. But the argument that you can’t spend more than you have in your account doesn’t carry much weight. Just like the overdraft coverage you might have on your checking account, many debit cards offer the same “protection,” and then charge you for the privilege.
Let’s say you go to the drive-through window for a burger and fries. You swipe your debit card and drive off. Simple. But if there are insufficient funds in your account—and there is no warning system that alerts you to the fact—that Happy Meal could end up costing you an additional $35 in overdraft fees. You could have eaten a steak in the best restaurant in town for that price.
Then there are times when you think you have enough in your account, but not all of your cash is available to you. If you use a debit card when you stop to fill your gas tank, the “authorization” actually blocks up to $50 in your account to guarantee payment. So, the difference between what you actually spent on gas and the authorized block is money not available to you for your next purchase, and you’re likely to be hit with an overdraft fee when you get that burger.
Last year $459 billion was spent on Visa consumer debit cards. And an amazing $4.7 billion was paid on overdraft fees triggered by debit card transactions or ATM withdrawals, according to the Center for Responsible Lending.
Credit cards and debit cards are regulated under different laws. A credit card is treated like a loan and, in most cases, the maximum liability for a lost or stolen card is capped at $50 (which is often waived).
The liability on debit cards, however, can be limited to $50 only if the loss is reported quickly. After 48 hours, the amount you can be responsible for jumps to $500, and it can be even higher under certain circumstances.
So, is it credit or debit? I’m a credit card guy, myself. And I pay off my balances every month.
Part of getting a handle on your finances is controlling debt, not letting debt control you. It’s nearly impossible to navigate today’s consumer maze without at least one credit card, but it’s important to pick the right card to match the way you use credit. It’s your money; don’t waste a penny of it.
Don Kuehn is a retired AFT senior national representative. For specific advice relative to your personal situation, consult competent legal, tax or financial counsel. Comments and questions can be sent to email@example.com .