Six credit card guardrails to follow

KJ: A few months ago we posted about ways to use credit cards to your advantage and what the credit card companies don’t want you to know. This post takes a slightly different spin to focus on six credit card guardrails to commit to:

Avoid a balance
KJ: Credit card companies want you to carry a balance from month to month since that is their ‘cash cow.’ With interest rates so egregious (typically 16+%), carrying any balance can make it all that more difficult to get back on the right track. It’s not realistic to make 16% on your investments, so why give that option to the credit card companies?
AJ: This is credit card ownership 101. If you HAVE to carry a balance from one month to the next, do so with an achievable, manageable plan in place prior to doing so. Prior to Kirby and I marrying, there were some months where I needed new shoes for work because my current pair was literally falling apart and couldn’t wait to buy them until I had enough money in my checking account, so I put them on a credit card. I never allowed myself to carry the balance more than one month from the date in which I added the purchase to the card. Needing new shoes shouldn’t open a gateway to excessive spending.

Avoid teaser interest rates and gimmick rewards
KJ: Holding a card for a long period of time is good for your credit, so take the time to sit down and evaluate what the card’s benefits are beyond the initial term. Often, when you ‘lift the hood’ you will find it isn’t the great product that first appealed to you. One such example are department store and merchant specific cards: they are often not worth the hassle of the card. You often get a one-time discount and nominal rewards, plus it’s more cumbersome to keep track of yet another card with yet another due date. As such, we avoid most of these like the plague (with the exception of our Banana Republic card). It has better rewards than our main rewards credit card, and it gets great discounts that I get to use on products I was already going to buy. So far, it’s the only one of its kind we’ve found…
AJ: Most people we know would agree that it’s horrifying how much credit an unemployed college student can qualify for. Just because you’re not in college anymore does not mean that the credit card offers are any more reasonable than they used to do. Most college kids just plan to buy beer and food, you’re talking about major purchase with serious long-term ramifications if handled improperly. Checkout Bankrate.com if you’re looking for a card.

Evaluate annual fees
KJ: My experience has been that annual fees are often not worth the rewards. You find yourself stretching to take advantage of the reward…the opposite of what you should do! There are so many credit cards available with no fee and with rewards that you can typically find a card that suits your needs while avoiding the fee. Take the time to analyze what you would save compared to another card that may have less attractive interest rates or rewards. If you don’t know what you’re spending, then start by building a budget.

Know thyself
KJ: If you have trouble with credit cards, then be honest with yourself and do not apply for them, or at a minimum only keep one on file. The potential credit score benefits of having more cards coupled with low to no balance seldom outweighs the interest, penalties, and headache that it can bring if it gets out of control and you build up a balance. In a culture of overindulgence, it’s easy to binge on credit. Making a purchase in today’s world without credit is like telling a person with a food addiction to avoid food. It may not be an all or nothing conversation. It may take a lot of time and struggle, but learning to coexist with credit is a powerful discipline…especially if you can turn that struggle into triumph by getting rewards on purchases you were already planning to make. That will surely make your wallet happier!

Know your wallet
AJ: Make sure that you know what credit cards you have. If you can’t immediately identify how many credits cards you have and with what company, it might be time to evaluate your ability to keep a credit card at all.

Learn from your mistakes
AJ: As you consider your long-term goals, consider the damage that debt can do to those possibilities. I recently heard a woman in her 50s tell a story about how credit cards from years ago have continued to prevent her from purchasing a home at all because she cannot qualify for any kind of loan at any level. How devastating! To be able to afford monthly payments on something that would improve your lifestyle but not be able to receive the initial capital necessary to take that step based on mistakes you made years ago is truly life-changing. Fortunately, bad credit by law has a limitation on how long it can stay on your credit report (seven years from the last date of activity, but potentially up to ten years), so it won’t haunt you forever, but it can surely drag you down for years!

    Have you found a card that is worth the annual fee?
    Tell us about your credit card woes and struggles. What helped you break free?
    What are the credit card rules you live by?

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Paying down debt

KJ: If you are working on paying down your debts to get on the right track to be financially secure, then there are a plethora of resources out there on how to pay down debt. What should you do, where do you start, how do you succeed?

There are a lot of conflicting rules on whether you pay down your lowest balance first (the Dave Ramsey ‘snowball’ method) or pay down your card with the higher interest rate. Like most recommendations, I say: it depends. Sometimes it’s not just a matter of simple calculations when you throw in the curve ball of personal finances and spending behaviors.

Method One: Start with the highest interest
The method that saves you the most amount of interest over time is to pay down the card (or debt) with the highest interest first. This method works best for people who can easily focus on the long-term and are apt not to add to their cards. Sure this may be better for your wallet, but you often have little success if you don’t see the fruits of your labor paying off – especially if you have a large card with a large balance and a high rate that could take months or years to chip away at.

Method Two: Start with the lowest balance
Your debt with the highest interest rate may have a higher balance and thus may take longer to pay down, so you may get frustrated with the progress (or lack thereof) if it takes “too long.” For this reason, Dave Ramsey’s ‘snowball’ effect involves paying down the lowest balance first, then continuing to use the payments to pay the next highest, and so on and so forth. This particular system can be a great way to see results fast, so you can see the fruits of your labor sooner. Hey, I paid off two cards already, let’s keep going! And sometimes, this emotional ‘buy in’ that it helps you accomplish can be far more powerful to get you to consistently pay more and more down on the debts as you can, so you ultimately work your way to the highest balance and can pay it down quicker than you had thought possible! Say you had the following scenario:

    $3,000 credit card with $125 minimum monthly payment
    $2,000 credit card with $75 minimum monthly payment
    $500 credit card with $25 minimum monthly payment

You would start by making the minimum monthly payments to each of the three cards and add all extra contributions toward the $500 card. Once that one is paid off, then you apply any extra payment and that $25 minimum toward the $2,000 card until it is paid off, and so on and so forth up until the $3,000 card is paid off. Then, once complete, start building back up your savings and get back on track, so you can avoid building up debt again in the future!

AJ: I personally hate paying interest on anything. In an ideal scenario, you avoid putting yourself into multiple situations where you owe someone else interest, but if you do need to live on borrowed money and time temporarily, do your research. Ensure that you have investigated all of your credit card options, mortgage options, and car loan options. Consider refinancing opportunities and additional ways to help you minimize the amount of interest you are paying that makes someone else wealthy.

The good thing is…once you pay down your debt, if you continue with your behaviors and direct the amount you previously focused on debt payments to saving, then you won’t have to think about or worry about this issue again! Invest in a software program like Quicken Deluxe 2013. Your wallet will thank you and you’ll help support us a little too :) If you prefer the free method, you might try Ready For Zero.com. I don’t have personal experience with this site, but I would love to hear your feedback!

    Have you paid down significant amounts of debt in the past?
    What method helped you through it?
    If you had it to do over again, what would you do differently?

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Don’t be afraid to ask for help

A sea of debt

AJ: Our nation’s debt is a constant source of anger for Americans regardless of political party. So why do so many individuals think it makes sense to take on enormous amounts of personal debt?

Everyone wants to think that they’re unique, but the reality is that most people struggle at some point or another. You absolutely cannot anticipate and plan for everything that comes up, but you can choose how you address the setback.

Don’t buy a car that costs more than you make in a year. Don’t spend more on eating out during the weekend than you make in a week. Don’t go to Vegas to take a break from your life before starting your child’s college fund. It’s all obvious, but in a moment of stress or excitement people seem to lose the ability to make rational choices, choosing instead to make small purchases on credit that ultimately cost significantly more in the long run.

It’s easy to get behind

It’s really easy to get behind, especially in relationships where communication isn’t consistent, but make a plan to dig yourself out quickly. If you’re fully extended each month and an over and above expense comes up, find another source of income, even if it’s temporary.

If you let $1,500 sit on a credit card with an interest rate of 15% and only make the minimum payment (not adding any purchases…), after about 2 years you will end up paying almost $3,000! That takes your cost from about $63/mo to about $125/mo.

Seek help

I don’t know many people who would be too proud to ask a chef about how to use a certain ingredient in a recipe, so it makes no sense to me why anyone would be too proud to ask for help with their finances. Where did this idea of secrecy around money come from? If you are in trouble and need help, ask. Everyone pulls from different experiences, and you don’t have to be a financial advisor to have great tips on living a reasonable lifestyle.

Many financial advisors charge 1% of assets under management to provide you with financial guidance. Take the time to at least have a conversation with someone who is trained to help people invest wisely.

Change can be good

KJ: What your parents’ parents did to save might not be what you should do. In our rapidly changing landscape, consider seeking a financial consultant with the know-how of today’s world.

When was the last time you got an illness and just said ‘it’s okay, I can take care of that in a couple months.” No! You address the ailment as it arises. Putting it off to address at a later time only makes the problem worse.

Since so many products didn’t exist decades ago, why think what worked then will work now? The concepts of a mutual fund, ETF, hedge fund, 401(k), 403(b), IRA, SEP, SIMPLE, HSA, MSA, and FSA have become alphabet soup! It is important now more than ever to seek a competent professional who can walk you through your goals, investments, and financial picture, and can help update all areas periodically given the constantly evolving financial industry. Life isn’t going to sit on the sidelines and wait for you to figure things out: you have to go figure life out, so it doesn’t leave you in the dust.

No one said it would be easy

It can be a challenge to open up about your finances with someone else. As Americans, it’s so much engrained in our culture to not speak about money and to keep that behind closed doors. No one said working through problems is going to be easy, but it’s not something most people are prepared to do on their own – they need a great support system. Just like losing weight or trying to achieve a goal, you need to know where you stand and where you are headed (Budgeting: a very good place to start). With the credit binge that the U.S. has had for the last 30 years (consumers, corporations, and the entire country), it hasn’t been easy cleaning it up these past four years (we have a long ways to go), but we can get there if we put our minds to it! It starts with you!

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Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

What the credit card companies don’t want you to know

AJ: I begged Kirby to write a series on how to use credit cards to your absolute benefit, and I’m so excited about this post. Kirby is an absolute machine at navigating the positive side of credit card and bank account benefits. Heed his advice, the points and cash back benefits are well worth it!

KJ: Beware: the information contained in this post may make you suddenly generate extra cash. This sudden windfall might leave you with a strange feeling of ‘why haven’t I always done this?’

I got my first credit card in my first year of college. There were offers around every corner (something quite disgusting for college students who typically have little wherewithal or knowledge on how to properly manage a credit card), so it was (and is) important to pick a credit card that is right for your lifestyle whether that be mileage benefits, cash rewards, or other rewards programs. At the time, I didn’t even have to provide any documentation showing what my income was in order to determine how much credit I could qualify for. Why is that okay? From the get-go, many companies are setting you up for failure. Why wouldn’t a college student with little income per month not say ‘sure, I’ll take $2,000 of credit!’? ‘It’s okay, I’ll just pay it back when I get that great job’…

My view for the only way to optimally use a credit card is to use it for your regular monthly expenses, earn rewards, and pay it in full at the end of the month. If you instead add expenses and simply make the minimum monthly payment, it would take you YEARS (or even DECADES if you are adding anything to the card each month) to pay it off, and that $1,500 tv that was such a ‘steal’ could end up costing you over $2,800! Since the interest rates that most companies charge are exorbitant (the best rates can be around 9% per year while good rates can still be in the mid-teens), it’s easy to fall victim to credit card companies. Few are designed to actually help the consumer from a long-term perspective, and in fact many keep the consumer indebted for years. When used properly though, you can enhance your savings by gaining some attractive rewards.

Here are the rules and guidelines I live by:

1) Do not get a credit card you cannot pay off regularly.

    The expenses and interest you will pay will FAR outpace the benefits you would have otherwise received no matter how enticing the card’s initial terms or rewards. Some of the best cards available for rewards I’ve found are Chase’s Freedom card for cash rewards as well as some of the Citi American Airlines cards for airline rewards. As unique as a budget, not all credit cards are for everyone, and one size does not fit all.

2) Get the card that fits your lifestyle to maximize the benefits.

    Shop ’til you drop. Not for purchases though! Do your research upfront Bankrate.com is a great resource to evaluate different credit card offers). For us, our preference is for cash rewards.

3) Save most (or all) of your rewards.

    If cash rewards are your elixir, when you come across ‘sudden’ money in the form of rewards redeemed, try saving it all (or at least save an equal amount to what you plan to spend). You didn’t have the money yesterday, and you don’t have much control of when it will hit next, so why tack it on as an increase in your lifestyle and living expenses? Once you get accustomed to a certain lifestyle, it is tremendously difficult to take a step back.

4) Stick to your guns.

    If you open a credit card for the rewards, and you plan to close it after the initial teaser reward, then stick to your guns. Pay attention to minimum holding periods (six months for some cards) where the rewards are eliminated if closed within that period of time. This is particularly important for some of the glamorous first time card offers. Especially with some of the bonus airline mileage cards, they have a fee after the first year of the card, which may make the card become unattractive after the grace period.

5) Credit is better than debit.(1)

    Compared to the debit card counterparts, you often have more protection against wrongful purchases and product returns in the event that something doesn’t work as the merchant promised.

6) Find ‘foreign travel’ friendly cards for out of country visits.

    Certain credit cards are ‘foreign travel’ friendly with minimum transaction costs and exchange rate fees. In my experience, Schwab and Capital One have been good companies for travel protection, access, low fees, etc. especially since they both typically reimburse all ATM fees. If you’re traveling out of the country, be mindful of charges for foreign transaction fees and conversion charges. Foreigners are particularly susceptible to identity theft/fraud, and watching your accounts regularly to see if something crops up is important.

7) Cash advances can be dangerous.

    They start charging you interest from the day you take the cash out. As such, use only as a last resort!

8) Try something new: LOWER your credit limit.

    Contact the credit card companies to reduce your available credit amount. Hear a pause at the end of the phone followed by a ‘what is that you say?’ and you will know it’s not a common question they receive. It’s so easy to fall into a trap of having several credit cards: the access to a higher credit limit and other rewards can be intriguing, but it can get you into trouble. If you reduce your credit available, you will have to rely more and more on your personal savings and cash before making a large purchase, but you will find yourself in a much stronger financial position long-term. Our grandparents used to pay for everything with cash (cars, larger down payments on a home, appliances, furniture, etc.), so why not bring cash back into style?

9) Do the math.

    If you are applying for a card with an annual fee, calculate if the rewards for what you regularly purchase more than offset the annual fee compared to other rewards cards. In order for the math to work, sometimes it entails increasing your expenses to make the rewards worthwhile, and that’s precisely the last thing you should do!

10) Easy isn’t always better.

    Credit cards make access to money easy, but when was the last time the easy route was the best route?

The methods outlined above are really only feasible if you have a good handle on what your income AND expenses are each month (see also our relevant posts: How to build a budget and Budgeting: a very good place to start). Then, you really KNOW what you can and cannot afford. Follow the steps of:

      (1) establish an emergency fund,
      (2) eliminate credit card debt, and
      (3) begin saving for your future goals (vacation or retirement).

You will find you are in a much better position to handle the unexpected that invariably comes up.

For some additional references with comparisons of credit cards versus debit cards:
(1) http://www.cbsnews.com/8301-505146_162-57365965/4-reasons-to-use-credit-cards-versus-debit-cards/
(1) http://www.fdic.gov/consumers/consumer/news/cnfall09/debit_vs_credit.html

What the credit card companies don't want you to know is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.