Thursday, April 28, 2011

Using Credit Cards The Smart Way-Credit Card Arbitrage and Other Issues

I have met so many people who are afraid of credit cards - even millionaires.  Let's begin with the obvious - if you can't afford it, don't buy it!  I feel like I may have stolen a Suzie Orman common sense piece of advice there, and although the goal of my blogging here is certainly not to stoop to her level of simplicity of issues covered here, I felt compelled to cover that fundamental.

I personally think that it is in every individual's best interest to understand and take advantage of credit cards.  They're a great tool to "keep more of your paycheck" if used in a responsible and advantageous manner.

Here are things to keep in mind:

  1. Don't just rely upon the standard car rental insurance included with the card... I always use AmEx's premium insurance these days...  I recommend that the same be done for trip interruption insurance.
  2. Remember that most cards double the warranty on a product to two years from one year; stop buying extended warranties at Best Buy, Staples etc.  The employees that sell those warranties make commission, and trust me, the stores aren't just breaking even selling those policies in general; they're making a killing on something you're already covered for by your credit card.
  3. Foreign transaction fees: When you purchase something overseas, your credit card will often charge you a foreign transaction fee to handle the foreign exchange process for you. In fact, part of that fee is imposed by Visa and MasterCard itself, so any Visa and MasterCard that charges you less than 1% is actually eating the fee. Capital One and Discover are the only two companies that do not charge a foreign transaction fee; Capital One actually pays the fee for you and Discover, since it’s not on the Visa or MasterCard network, just doesn’t charge for it. As I wrote in the other article, if you want to pick between the two then I’d go with Capital One because Discover isn’t as widely accepted overseas (Capital One cards are Visa or MC).
  4. Here's a great outline of credit card arbitrage that I recommend reading and doing only if you fully understand the pro's and con's:   I personally don't do this, but have thought about doing it, and know many that do do this regularly.  Something to ponder.
  5. Use your credit card for every single purchase, including small-dollar items such as food and gas. Then pay off the entire balance each month when due. If you spend $1,500 a month on your card, with a 1 percent cash back reward, you will earn $15 per month (more if you convert those points to airline miles). Plus, the money you would normally use to pay your expenses will earn a small amount of interest each month just by sitting in your checking account (if you do not have an interest rate on your checking account, consider opening one that does).  See my google search blog post for how to find such an account.
  6. If you have department store card such as a Macy's or Dillard's card and it offers a better rewards system than your regular credit card, use it when making department store purchases. Doing so may result in gift cards and exclusive coupons.  I'll often use my Macy's card at the register, then pay it off.
  7. Set up auto-pay for credit cards - it'll help you ensure you maximize the interest earned on the money while it's in the bank, and make sure your bills are paid on time to avoid late penalties and interest charges.
  8. Stop using debit cards instead of credit cards - for the reason stated in #7, use credit, not debit cards.  For those who are afraid they'll overspend using a credit card, and thus use a debit card - see my first disclaimer that you shouldn't spend more than you have - keep a book with you at all times and record your transactions if necessary to ensure you're staying within budget - the best rule is, if you don't need it, don't buy it.  That'll keep you within budget if you stick to this plan
  9. Take advantage of credit card offers - Discover sent me an offer of $150 extra savings if I spend $1,000 a month for the next five months using their card.  If I were to spend that much anyway each month, then why not take advantage of the offer?  $150 isn't a whole lot, but better to have it than not.
  10. Find the best card for YOUR situation.  There's a gazillion cards out there on the market; each person's spending categories, needs, carry a balance/no balance, points vs. cash back, and personal preference.  The AmEx Business Platinum Card, Discover More Cashback Card, and UPromise Mastercard are my personal credit card staples.  
    1. I also highly recommend the credit cards from the Pentagon Federal Credit Union - read this on how to join: and this for an overview of their credit card offerings:  Their AmEx is used by me only to buy airline tickets for 5% back; their Platinum Rewards card is great for gasoline purchases.
  11. Don't carry a balance from month to month - pay your bill in full each month.
  12. If you do currently carry a balance, make every effort to pay it off ASAP, assuming you're not being slick and taking advantage of a 0% intro APR.  
    1. Consider shopping around for a line of credit or a balance transfer offer with another credit card to pay off higher interest rate credit cards, or other lower interest financing methods.  
    2. Always pay off debt with the highest interest rates first, as a general rule - unless you're purposely carrying something like student loans from my prior blog post, where you're purposely in debt.
    3. Don't just stockpile cash in the bank earning 1% or less if you are paying 20% in interest on a credit card, just because you like to keep cash reserves in the bank for a rainy day - in most situations, that's penny wise, pound foolish!
    4. In the meantime, call your credit card company and ask for a lower rate if you're carrying a balance.
Feel free to post questions on the blog for me to answer in more detail.

1 comment:

  1. Another way to benefit is called the "float."

    For example on one of my Credit Cards the statement just was issued and I'm now at the beginning of the billing period cycle. I charge a $500 purchase to the credit card today it will be billed on the statement that comes out May 27 and the payment due date will be June 26. As such I won't actually be paying for the purchase for the months after I purchased it (all interest free since I pay my credit cards in full each month). That's called the float. That gives me 2 months to earn interest on the money or theoretically to save the money to pay off the purchase.