How to Be Smart When It Comes to Credit Cards

Credit cards are a great financial convenience if used correctly. However, we often hear horror stories about people losing sight of the fact that whatever they spend on a credit card is the bank's money, not theirs. Whenever charging something on a card, remember you always have to pay it back -- with a good deal of interest, if you're not smart about it!

Many people don't use credit cards correctly and can be fooled by deceptive advertising. Then they get very upset about how their credit was ruined or how they ended up paying high interest charges. Soon afterwards, they switch to a debit card and never use credit cards again. 

There is a middle ground.  Used wisely, a credit card is the ultimate in convenience and financing while giving you great, and free, benefits -- as long as you know how to play the game.

Here are some things you should know about credit cards:

• Use you credit card like a debit card, and pay it off every month. (This has the added benefit of increasing your credit score.) Only get a card that gives you something like air miles, hotel points or cash back. With all the cards out there competing for your business, why use a card that gives you nothing in return?

• Make sure your credit card offers online bill payment -- and most do. Then take advantage of this service! This will let you easily pay off the bill every month so you won't get hit with interest and penalty charges. Do not get a card that does not offer this service, since theoretically they can argue that your check was not received in time, charging you a small fortune. If you are late with a payment one month, call up the credit card company.  Most of the time they will let you off and refund you the fees if it is your first time.

• If you can, get a platinum card simply for the reason that they typically insure a rental car for damages. This can easily save you over $25 dollars a day, plus they usually give you other benefits that can really add up.

• If you charge a lot, consider paying the $50 or $75 a year to get the air miles card.  Even if you only charge $20,000 a year, that is a free flight that is worth at least $200. If you charge less than that, go for a free hotel or cash back card.

How the 0% scam works and how to beat it:

Like me, you may get 0% offers all the time. You may think it's great to use the bank's money for free for up to one year or more -- and it can be! (see our credit score page, for instance) However, you must read the fine print:

• First, most cards will charge you a fee to do a balance transfer.  Usually this is 3% with a maximum of $50-$75. In essence, if it's a six-month offer, you could already be at more than 6% interest from the start since you pay the 3% right away!

• Next, if you charge anything on the card, the credit card company will immediately start charging you interest on that purchase.  Even if you pay it back, credit card companies apply payments to your balance transfer first, then to your purchases.  Example below:   

  • You transfer $10,000 onto your new credit card at 0%, and they charge you the 3% fee. However, since you were smart you made sure the 0% lasted for one year.  The next day you go out and buy a new couch on the same card with that bonus you just got for $2,000.  When you pay it back at the end of the month, your $2,000 gets applied to the $10,000 you borrowed first.  The credit card company will then charge you 12+% interest on the $2,000 until you pay the 10,000 off.  Which basically means you have to pay 12+% interest for a year on $2,000.

  To avoid the previous scenario, DO NOT charge anything on your 0% credit card. What we do is put the card in a safe drawer and never use it.  In essence, you get the money at a one-time 3% fee if you play your cards right, which is a great deal.