It’s not unusual for even the most savvy credit-card-carrying consumer to fall into some of the most popular traps for spenders set by credit issuers. I write about using credit cards wisely, but unfortunately, many who don’t get penalized with interest and fees. Even those who always pay their credit card bill in full are assisting the issuing companies and banks through the interchange fees merchants have to pay to Visa, MasterCard, and American Express each time they accept a payment using a particular credit card.
Americans for Fairness in Lending (AFFIL) and Consumers Union have devised ten tips that should always be considered when making decisions about your credit card usage. While the article is primarily intended for college students, there is nothing about these tips that would make it exclusive to a certain level of educational progress. I’ve added some of my own thoughts.
1. Don’t get tricked, trapped, or suckered into a card with bad terms. AFFIL suggests looking for a low long-term interest rate rather than a teaser rate. This is a moot point if you are able to consistently pay your bill in full. Unfortunately, not everyone can make that kind of commitment. If you know you’ll be spending in debt for a while for whatever reason, and you don’t want to risk your credit score by jumping from one introductory offer to another, look for a low long-term APR.
2. Once you choose a card, don’t let your guard down. A “fixed” interest rate doesn’t mean that they can’t change your rate. Chances are your interest rate will change at least once, and the notices that warn you ahead of time often look like any other junk mail. In my experience, some companies are notorious for “forgetting” to send your credit card bill. If you’re not on top of your schedule, you may miss a payment. This could have very expensive consequences.
3. Pay your bill on time. It’s not enough to get your payment to the credit card company in the nick of time. Get it there early so there’s no question whether you missed the deadline or not. Setting up automatic payments can be a good idea, but not many credit card companies allow you to pay your bill in full each month. Usually, if you set up a payment schedule, it must be for a consistent amount each month.
4. Pay your bill in full. This is fourth on the list, most likely because these tips seem to be in chronological order rather than importance order. As a matter of importance, this is probably at the top. This is the only way to avoid paying more than you should for any purchase on your credit card. Once you don’t pay any bill in full, many credit cards employ two-cyce billing, which means you could owe even more interest even after you think you’ve paid off your entire balance.
5. Do not go over your credit limit. In the “old days,” credit companies would decline your purchase if you hit your credit limit. Now they let the transaction complete and add on “over-limit fees.” Also, a high credit limit might entice someone to spend more than they can afford. If the credit card companies think that Johnny can handle a $10,000 credit card bill, they must be right, right? Nope.
6. Stay as far away from a credit card “cash advance” as you can. This is one of the most expensive forms of debt available, except for perhaps payday loans. It’s usually a last resort — borrowing from friends or family may hurt your pride more, but cash advances will hurt your wallet. If you have a cash advance and purchases on the same card, your payments will go towards the low-APR purchases before the high-APR cash advance, which means you’ll be paying much more interest for much longer.
7. Ignore those in-store “15% off if you sign up for our credit card” offers. Most people should follow this advice. There are a lot of pitfalls with this type of behavior. Your credit score could get dinged quite a bit, and if you plan on qualifying for a mortgage, you may get a lower rate and end up paying thousands more than you might have otherwise over the course of your entire life. Was it worth it to get a few hundred dollars off an HDTV? Maybe not. But then again, if your credit score is not a concern and you absolutely pay your bill in full every month, there is no harm in the occasional store credit card for an instant discount. You win with the discount, and the credit card company wins with a healthy interchange fee from the store.
8. Carry only one card. I can’t think of any situation in which a typical consumer will need more than one credit card in your wallet. I carry one personal card and one business card to separate my purchases, but that’s only because I pay my bills in full and I look for cash back. A “typical consumer” — one who doesn’t always pay in full — would be better off with cash or debit cards for most purchases and credit only for small emergencies.
9. If you do get into credit card debt, get help right away. AFFIL suggest starting with the Consumer Action Help Desk. The bottom line is that if you get into credit card debt, regardless of how well or strongly issuing companies market to you, you are responsible. If you have income, getting out of debt doesn’t have to be a monumental task. Simple mathematics, while also taking into consideration the motivation provided by a series of small achievements, will show you the best way to get it done.
10. Remember your other option: cash. Cash is (almost always) king. It will certainly keep you out of trouble, and as long as the money is yours, you know that you are not spending beyond your means.
Holiday Season Tips to Avoid Credit Card Traps for College Students [AFFIL]
Image credit: zingersb
Updated August 9, 2011 and originally published December 6, 2007.
{ 10 comments… read them below or add one }
You almost always overspend when using plastic. When McDonald’s started offering plastic as a payment option they saw that people who use cc’s to pay for their meal spent 27% more than those that use cash. Unless you are super thrifty and can control the urge to spend use cash. It keeps you honest every time.
Regarding # 7. Sometimes the game you describe works well (take the discount and pay off the balance before incurring a single cent of interest). But sometimes it’s linked with a “same as cash” deal. So you leave the store thinking that you won’t have to pay anything for a year or more and you won’t be charged any interest.
Hopefully, most people now realize that they have to pay the whole balance off by the time the grace period is over or interest is collected retroactively since the date of purchase. An incredibly expensive mistake.
But, in addition, you often have to at least make minimum payments every month starting the month after purchase in order to preserve the “same as cash” interest savings. I haven’t found a store that clearly communicates this new wrinkle, yet it winds up giving you another monthly bill and, as important, something new you can easily forget, yet with negative financial consequences. We’re all busy enough already. Pay for it then. If you can’t afford it, there’s plenty of advice out there for you (of which don’t buy it is the most concise and accurate.)
Good point, Michael–same as cash is a nasty trick. Because nothing’s actually like cash except cash itself. The store wouldn’t offer it if it weren’t a lucrative option for them…
Saving Freak: When you say “You almost always…” what you mean is “On average, most people…” There is a big difference. There is no reason why any one individual should be given advice based on averages, unless you know absolutely nothing about the individual. Individual behavior is hardly ever average. If you’re speaking to a mass audience, sure, but if you have the chance to really evaluate the behavior of an individual, you can give the better advice then saying, “You shouldn’t do this because most people fail.” (This is the biggest problem I have with personal finance advice in general.)
Michael: I agree. The same-as-cash trap can certainly be dangerous, and the store won’t provide you all the details. It can be beaten with full information and controlled behavior (on time payments that meet the issuer’s expectations).
Will “most people” be successful? Probably not. But that’s because “most people” don’t take the time to learn or understand how to do so or aren’t motivated enough to ensure they’re sticking to the rules. The issuers make it tricky and unlikely but not impossible.
Nice post there from Michael I have seen more than one friend fall for that even after I explained that to them and they wouldn’t believe thats how it works.
Also I carry two cards my Amex and a backup for the places that don’t take Amex.
I would never recommend only carrying one credit card. What happens if it gets declined through no fault of your own? Or if a merchant won’t take that kind of card?
At least half of the time I travel, one of my cards gets deactivated for a “security” alert. The first I hear of it is when the card gets declined. They see charges that don’t correspond to my “usual” behavior and bam, the card is shut off until I call. ALWAYS have a second card on hand.
Nice post, lots of useful information. Have to agree with Jeremy here about point #8. My main card is American Express (Blue Cash), but unfortunately it’s not accepted everywhere so I have to rely on a Visa/Mastercard for backup.
I will say that carrying two cards can be dangerous as you have to keep an eye on twice as many balances. I’ve been suprised once or twice with my CC balance.
Any tips on paydown of debt? I have under $10,000 in a single credit card debt…personal. I travel a lot for work and I have everything I need materially, car paid off, mortgage is manageable, bills are manageable but my credit card seems never to go down. It is a low interest card already but still. It is my only debt other than my mortgage. Ideas? Tips? Advice?
Since paying off my credit card balance (due to poor money management in college), I have paid every bill in full. I made the cash advance mistake once in my college years and never will again. I only carry one credit card, now a rewards card since I pay everything off on time every month. Even though I charge many times each month, I still treat each transaction as part of my spending plan, subtracting the amount from the relevant categories to ensure I do not have a surprise bill at the end of the month.
Frugal P. Thanks, seems reasonable.
I like a straightforward approach, I’ll do it!