Credit Cards: The Good, The Bad, and The Truth

This is a long post, but it is full of information that I hope you will find useful.

You might not realize this, but credit cards can be a deal finders best friend if you are smart about it. Between discounts and rewards, the smart consumer can really take a lot away from using credit cards. What does being smart require? There are three major things that smart shoppers need to remember:

1. Don't spend money you don't have
2. Always read the fine print
3. Pay your card off every month and don't carry a balance

I got my first credit card when I turned 18 and I still hear my mother's voice in the back of my head reminding me to be careful. As an 18 year old, the credit card had a modest limit of $500. You can't get in trouble with a $500 limit. Right? Wrong. I was under a misconception that the limit meant the card would be declined if I was already carrying a balance of $500. I bought textbooks for my classes and some basic items for my dorm room. When my bill came in the mail, I learned that they will still allow you to charge purchases after you hit your limit. They just add lots of fees for going over the limit.

Since that a faithful day years ago, I am proud to say I have never paid another penny in fees to a credit card company. I am going to share with you my limited knowledge about credit cards. Please note that I am not a financial person and do not claim to be an expert at the ins and outs of credit card companies. I am also not going to recommend a specific card for you. Everyone is different and you need to decide if you need a credit card and what to get.

The largest piece of advice I can give you regarding credit cards is the first point I mentioned above "Don’t spend money you don’t have." That is the number one reason people get into trouble. It’s nice to know you can spend the money if some kind of emergency comes up, but it doesn’t mean you have to spend it on junk.

This does not mean ignore the other rules because if you don’t get in trouble from over spending, you might get in trouble from that fine print. Companies hide many things in the fine print including fees, their ability to change your rates with or without your knowledge and more. When you accept a credit card, you have agreed to everything in that tiny font if you read it or not.

Finally, try to pay your card off every month and don’t carry a balance. When you carry a balance over, all you are doing is costing yourself more money in the long run. If you pay your entire balance you won’t have to worry about interest or debt. You will be able to sit back, relax, and enjoy the rewards that some cards offer.


Store cards – Why should I get individual cards?

Many stores offer additional discounts to card holders. These stores hope that in giving you a discount on your purchase, you will spend more money and then hold a balance over. 10% off a new television that takes you months to pay off on a credit card with a 25% interest rate will end up costing you, not saving you any money in the long term.

If you are smart about it, these cards can save you money. Make sure you pay off your bill on time and in full to avoid late fees and interest. Then those deals will work in your favor and save you money. Also check your monthly statements because some stores will mail you additional coupons with your bill.

Remember that the more cards you have in your wallet, the bigger change of overspending so don’t open up an account at every store that offers one. Just open one or two for the stores you spend the most at.


Credit Report – Do I really need to sign up for something to see my report?

We’ve all seen the commercials on television with catchy music telling you to go check out your free credit report. Have you seen the fine print? Most of those sites advertised on television require you to sign up for a free trial of a credit monitoring program which is difficult (but not impossible) to cancel before they start charging you a large monthly fee. I do not know enough about credit monitoring programs to know if they are worth the money, but there is another option to obtain a free copy of your credit report.

Legally, you are allowed to request a free credit report once a year from each of the three major credit reporting companies in the United States. The Federal Trade Commission (FTC) created https://www.annualcreditreport.com to allow consumers easier access to the three companies. I recommend spacing out when you request the reports. Since you are allowed one a year for each company, you can easily check your credit report every four months from a different company. The free credit report does not include your credit score, but it does include all the information used to calculate the number.

Requesting a free credit report will allow you to watch for mistakes and fraud. It’s better to find out now, than when you found your dream house and can’t get approved for a mortgage. If you see something wrong in report, you have the right to contact the company that provided the report in attempts to correct the information. They will of course look at any mistakes you point out and work to verify and correct the information if necessary.


Introduction Offers

Make sure you read ALL the fine print when applying for a credit card. That 4% interest rate that you think you are getting might only be valid for an introduction period before jumping to 22%.

Be extremely careful when you see the tables set up at sporting events, malls, and airports. They might be giving you a free tshirt, umbrella, or other “gift” for applying but you are normally in too much of a rush to read the actual offer and the card might not be the best for you.


Annual fees - Are they worth it?

Some cards that you will find offer you better reward programs for an annual fee. You need to decide if these rewards are worth the cost of the annual fee since that is what you are truly paying for. You are not paying to use the card itself; you are paying for the reward. When you compare the “free” card to the annual fee card from the same airline, the difference is in the amount of miles you earn per dollar spent. For someone that is spending enough to earn multiple roundtrip tickets each year and likes to travel, that fee is worth it. If you are only spending enough money to earn one or two tickets per year, are you really getting anything for free when you shell out the fee?


Rewards

There are cards out there that will offer you rewards for using the cards. Airlines, gas companies, hotels, and more offer cards that will earn you free things. I have noticed that many cards with rewards often have higher interest rates compared to similar cards without rewards.

When selecting a card because of its reward, you really need to decide if it’s something you will use. Do you travel enough to want free hotel rooms or would you prefer something that allows you free electronics? Some cards offer a cash “rebate” on purchases while others might offer points that can be spent in a catalog on merchandise.


Fees and Interest Rates

Once again, reading the fine print is extremely important when selecting a credit card. Every card will have fees and interest rates but they will differ depending on many variables. You might be charged a fee for calling the 800-number or for requesting an additional copy of your monthly statement. You want to make sure you are aware of the fees imposed on your credit card before you are charged.

Interest rates are difficult for me to explain here because there are so many different types of interest. My advice is avoid interest all together by paying in full every month. If you never carry a balance over, it won’t really matter what the interest rate is on your card. Since most people find it difficult to pay their cards off every month, it is important to find a card with a low interest rate. Also check how the interest is calculated. Does the card have a fixed or floating rate? A floating rate means that the company can change your rate with little or no notice, however a fixed rate might be slightly higher. Another thing to check is how often interest is calculated. Some cards will compound interest daily on the new balance while others might only add interest monthly on the original balance.

I hope that you have found this information helpful. If you have any tips for the Making Cents of It community, please feel free to share in the comment section. Links to information is great but if you post spam links such as referral links or sites that require paid memberships for information, your comment will be deleted. Thank you for understanding and helping to make Making Cents of It a great community.