Credit Cards
Ahh, credit cards...those all-too-convenient pieces of plastic that are probably the single biggest reason that Americans currently have a negative savings rate. They've also sparked a lot of debate here at BCBR--some of us consider them the devil's tool, while others wouldn't want to be without them, and have found ways to actually make them pay us. Regardless of our feelings on the matter, credit cards are a fact of life for most Americans, and learning to use them responsibly is one of the most important steps in becoming financially secure. Here are some of our best tips for staying in control of your credit cards:
Pay Off Your Balances
Credit card balances can absolutely destroy your financial health. Some cards charge annual yields of 30% or more, and paying the minimum each month will get your balance cleared right around the next ice age. The most important step to get out of debt is to start attacking all of you card balances, even if you have to sacrifice saving and investing in the short term. There is NO investment--not stocks, bonds, cds, real estate, or anything else, that will yield returns equal to the APRs on most credit cards, Before you start saving for your future, take care of your credit card balances. Now.
Keep your lines of credit low
This is just common sense. You can't spend what you don't have, and if your total line of credit is small, then you're less likely to get in over your head. Most of us here use cards with $2,500 - $5,000 spending limit.
Limit the Number of Cards
There's rarely any reason to have more than 1-3 credit cards. Over the years you've probably signed up for cards that you never use and have completely forgotten about. Your credit report will show you how many lines of credit you have, and when was the last time you used them. You can access a free copy of your credit report once a year by going to www.annualcreditreport.com . Once you know which accounts to close, call up the company to cancel them. They will almost always try to persuade you to stay, but be persistent, and request they send you a written notice of cancellation.
Stay Away From Store Lines of Credit
It can be tempting when you're at the check out line in Sears and the salesperson offers you ten percent off if you sign up for their card, but in the end it's a bad idea. More credit cards means more chances to get into debt, and that's just not worth saving a few extra dollars.
Have Them Pay You
Most people know that there are credit cards that offer frequent flier miles, but did you know that many will actually pay you cash? These cards, like Discover or Citi's dividend rewards cards, will typically pay you back 1% on all your purchases, and up to 5% for items like gas and groceries. Of course there are catches--they typically only will send you a check when your rewards reach at least $50, and most limit the total they'll pay out each year to a few hundred dollars. Still, if you put many of your daily expenses on them it's an easy way to pocket an extra one or two hundred dollars every year. Keep in mind that this only makes sense if you pay off your balance each month. If you let your balance carry over, then the interest charges will quickly (like in a month) erode any dividends you've earned.
Shop Around
As with any consumer product, to find the best deals on credit cards you need to do your homework. Check out comparison sites to see what the best card is for your situation. One of the best we've found is www.cardoffers.com
If you keep these tips in mind you'll be well on your way to learning to use your credit cards responsibly.