What I Learned (The Hard Way) About Credit Cards
People approach credit cards in different ways. For some, caution is king. They might try to avoid plastic altogether or log onto their account management page after making a purchase so that they can pay off the entire balance immediately. On the other hand, there are the free spenders: people who disregard things like credit limits and credit scores and simply charge and charge, making only the absolute minimum payment at the end of each month.
Most credit card users fall somewhere in between these two extremes. These average consumers are wary of falling too far into debt, but sometimes come up with a “life is too short to worry about money” excuse and use their plastic to pay for a trip or to purchase a flat screen that they can’t pay off right away. They probably carry a bit of debt, but aren’t teetering near bankruptcy. I fit somewhere in this demographic, and I think that most other people reading this do as well. What can we, the silent majority, do to get the most out of our plastic without exposing ourselves the pitfalls of credit card usage?
Here are some credit card hacks that I have learned, mostly from mistakes and pure, dumb luck.
What is one of the most useful credit card perks? Earning airline miles or cash-back bonuses is nice, but the perk that I’ve gotten the most use out of over the years is purchase protection. Most people don’t know that their card offers purchase protection unless they comb the fine print of their user agreement.
Purchase protection acts like a warranty on purchases that you make with your credit card. That means you don’t have to buy the extended warranties that you are usually offered when purchase big ticket items like electronics or appliances. The credit card company can even advocate for you if you want to return something to the store and are having trouble doing so. I have used this perk several times, both to return items to the store after the standard return period had ended and to get new a product when the original one didn’t work to specifications. Now, I never apply for a card that doesn’t offer purchase protection.
Rewards cards are worthwhile if you have a strategy and if you stick to it. My biggest credit card mistake was using a rewards card when I needed money in an emergency. I’d been saving up miles by making purchases and then paying off the entire balance each month. When I needed car repairs, I charged it, but didn’t pay off the balance for months, leading to interest charges that all-but canceled out the value of the miles that I had earned.
Looking back, managing my account and using my card as often as possible was too much work for the $150-worth of tickets that I would have gotten. The only time I ever really got significant rewards was when I earned an introductory bonus of 25,000 miles from a Delta Skymiles card. If you can find a good intro bonus (like one that awards you a lump of miles after you spend, say, $500 or so in the first three months that you have your card), a rewards card can be worthwhile. Otherwise, they really aren’t useful unless you are a super-frequent flier.
Buying something with a credit card isn’t an all or nothing proposition. This is especially the case with big ticket items. It can be worthwhile to pay partially with cash or debit, and then pay the rest with your credit card. This strategy will lead to a lower overall balance, which means less to pay off and less damage to your credit score, which can fall significantly if your balance is too close to your credit limit. If you’re like me, it is simply easier to throw down your card and charge the whole purchase. But the shoot-now-pay-later approach isn’t the only way to pay. I have been glad on a couple of occasions when the half-cash-half-credit strategy saved me from months of hefty credit card payments.
There comes a time when you just have to stop reaching in your wallet for your credit card, and that time should be sooner rather than later. The easiest way to keep your debt under control is to tone down the spending when your balance starts getting high. Maybe an unforeseen repair has left your balance near your credit limit. The temptation might be to get another card so that you can keep using credit as you had in the past. Speaking from experience, this is the worst thing you could do because it will bring your debt up to another level, one that might not be as manageable. If you ever apply for credit, apply when your debt isn’t getting out of control. It’s simply too easy to compound the problem by thinking: I already have a lot to pay off, so what’s a little more? And a little more? And…? This is how seemingly normal credit card users like you and me can talk ourselves into serious debt.
What’s the moral of this story? Credit cards are financial tools, not tickets to a more-bling-filled-lifestyle. You can take advantage of things like purchase protection and introductory rewards bonuses, but don’t expect anything more than that from these little rectangular pieces of plastic.
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About Josh Lew Josh Lew lives in the Midwestern US when he is not traveling. He is a columnist for Gadling and has contributed to Hackwriters and Skive Magazine.