First things first: There is absolutely no way to benefit from using a credit card if you run up a huge credit card debt balance and don’t pay it off quickly. Credit card debt is the largest contributor to this country’s problem with high-interest consumer debt.
Thanks to some of the most sophisticated marketing and advertising techniques known to man, however, credit cards have become ingrained in our very culture, so it isn’t realistic to think we can get rid of them altogether. Although, that’s still the strategy we would recommend in most cases.
So for those of you who feel you’ll never be able to give them up, here are the do’s and don’ts you’ll need to use credit cards to your advantage.
First, credit cards cause so many problems because of their high, compound interest rates. So the most important strategy you can employ with credit cards is to keep the interest rate as low as possible.
Many cards charge 18 percent and more, especially department store and gasoline cards. If that’s the case with your cards, you need to do a little comparison shopping. There are many cards available for as low as 11 or 12 percent. Start reading the fine print on those credit card offers with the low introductory rates, and see how high they climb after your six months are up. If they only go up to 13 percent, and you’ve got a balance on another card at 18 percent, you can save a lot of money by transferring that balance to a new card.
We will warn you, though, to exercise extreme caution when playing with this particular fire. It does you no good to transfer a balance to a new card if the permanent rate is the same or even higher than your original one.
Another way to reduce your interest rate is to ask the credit card issuer to do it. Many of these cards understand that they lose business by sticking with their higher rates, and will gladly reduce it if it means keeping you as a cardholder.
Most important, if you transfer a balance from a high-interest card, be sure to contact the card issuer and close the account. We see a lot of clients who transferred a balance, then ran up a new one on the original high-interest card.
If you are disciplined enough to pay off your balance every month, credit cards can be a valuable tool. Certainly, it’s easier to rent a car or hotel room with a credit card than it is with cash.
Keeping accurate records of your expenses is also easier with a credit card because the monthly statement compiles your purchases into one neat package. This is important if you have business expenses for which you are reimbursed, or that you claim as tax deductions. Also, there are certain protections you get when you purchase with a credit card, like added warranties on certain products, that you don’t get when you use cash.