Friend or Foe? How to Use Credit Cards to Your Advantage
by Jason Dean
In the 1990s, prominent personal-finance gurus were nearly unanimous in offering one simple instruction to their debt-ridden followers: Cut up your credit cards!
Unfortunately for the people who followed this guidance, it turned out to be a bad advice. After all,Â open accounts in good standing look good on your credit report, and if you do close your accounts, you might have trouble opening new ones in the future. Worse yet, people who do not have adequate access to credit are often left with no option but to patronize payday lenders to meet emergency financial needs — andpayday-loan shops can charge as much as 300% APR or more!
Yes, intelligent consumers must exercise discipline when using credit cards, but we shouldn’t view them as “little plastic tools of the devil.” No, we should think of credit cards as our friends. Not only do they make our lives easier and allow us to buy things we otherwise might not be able to afford, but they can also serve as virtual income sources themselves!
For example: If you have a credit card with a billing cycle that ends the first of each month, your payment may not be due until the fifteenth. Finance charges (interest) are typically assessed only on the previous balance on your card, meaning that if you pay it off in full each month, you pay no interest. This means that all the charges you make between April 1st and May 15th are interest-free, which is like getting a 0% loan from your bank! Even banks pay 6.25% interest on overnight loans from the Federal Reserve, so you’re really getting a great deal!
In fact, since inflation is generally 1-3% per year, if you look at the “real” value of your 0% loan, it’s essentially the same thing as getting paid 1-3% (whatever inflation is) for using your credit card! But of course, in order to get these benefits, you have to use your credit cards wisely. Here are some tips for getting the most out of your credit cards:
- Make sure your card doesn’t have an annual fee: A $30 annual fee on a $1,000 card is the equivalent of 3%+ interest on your APR. Only credit-card users who are trying to repair their bad credit should accept annual fees.
- Watch out for cash-advance fees: Most credit cards assess interest on cash advances from the day you withdraw the cash. Cash advances put a damper on the “virtual income” strategy outlined above.
- Always pay the minimum: If you have any financial problems whatsoever, of if you’re just a little forgetful, always pay the minimum payment immediately upon receiving your bill. You can then pay more (hopefully the entire balance) later in the month, but missing even one minimum payment can put a serious ding in your credit rating.
- Automate your life with credit cards: Set up one of your cards to pay some of your recurring bills, such as your cable payment, your cell-phone bill, etc. If you use one card for only this purpose, then you will never exceed your credit limit, and you’ll never have to worry about forgetting to send in a check for your bills — which can also damage your credit.
- Use balance transfers to your advantage: If you can shift a large balance from one credit card to a new credit card with a 0% introductory APR, by all means do it! In fact, many successful individuals use credit cards this way to avoid ever paying interest. Be forewarned, however, that many credit card companies are excluding balance transfers from their 0% introductory rates.