By BOB CUNNINGHAM
There are many folks out there who believe the credit card companies (more specifically, banks and other institutions which offer credit cards) are evil entities, with no other earthly purpose than to suck as much money from unsuspecting card holders as is inhumanly possible.
Yeah, that’s pretty much it. Who else would have you pay more than $17,000 for a $5,000 loan by essentially tricking you into paying a smaller monthly (minimum) payment when you could easily afford more in order to pay less interest?
But I’m not really down on these financial firms. The folks at Bank of America, Capital One, Chase, and Wells Fargo… at Visa, Mastercard, and Discover are like virtually all businesses out there. They want to make a profit in order to grow their business to, in turn, make more profit. It’s an American mindset that has worked well for a lot of folks, and allowed a lot of other folks to obtain gainful employment.
Still, trying to learn the subtleties of how credit cards work – what you can be charged for, how much interest you pay if you run a balance, and how best to take advantage of the myriad of offers for new accounts – is a daunting task, especially for younger adults and families trying to navigate their way out of too much month at the end of the money.
So with that in mind, here are seven steps for the personal finance newbie to consider that will allow for befriending the credit card companies and coming out ahead of them in their own arena.
1) Start off by obtaining one new card with a small line of credit in order to begin establishing a credit history. Even if you’re fresh out of high school and have never had your own credit card of any kind, it’s fairly easy to obtain one if you have a job. And if you do encounter difficulties getting a traditional card, contact a company like Premier Bank that will allow you to pay into a card account in advance, then charge off your established balance.
2) With your new card, go ahead and make one or more SMALL purchases, adding up to no more than $200, and start paying it off with monthly payments. The purchase doesn’t have to be something separate, and certainly doesn’t need to be anything you wouldn’t otherwise buy. Use your card for gas and groceries a few times, for instance. When you have roughly $200 charged, plan to make four monthly payments of about $50.
By doing this, you are establishing a credit history. In four months, the account will be paid off (do NOT charge anything else during the period you’re making the monthly payments). And you will start receiving offers for more credit, from other companies with higher credit limits, including perhaps an offer or two of 0% APR promotional rates.
The cost for this exercise in credit-building? About $14, based on the average newbie interest rate of 21% (according to BankRate.com). So if you pay off your $200 in four months – or, one third of a year – the full-year interest you would pay would be $42, divided by three = $14. Fourteen bucks is a small price to pay when you consider all the benefits you will ultimately reap from a quickly-established positive credit history.
I should point out that stretching the $200 purchase into four payments is a much better and more effective way to establish credit than paying off the whole $200 during the first month. Why is this? Because the credit card companies want you to carry a balance. They make a lot more money if you have a monthly balance owed, and they prefer you pay the minimum payment – a practice we will never, ever do during our life of savvy money and credit management.
3) If you’re offered a 0% APR promotional rate card, it’s okay to accept it but be 100% sure you understand all the terms. Some cards simply want to acquire you as a long-term customer in the hopes you will buy stuff after the 0% intro period expires and end up owing interest. This is fine, because you will learn the discipline and strategies to avoid that scenario.
There are other companies, however, that will try to small-print you past an annual fee of as much as $69… just to be an account holder. Note this here and now: NEVER PAY AN ANNUAL FEE ON A CREDIT CARD ACCOUNT. If a company says it will charge you, tell them you’ll cancel the account and go elsewhere. Simple as that.
4) Determine the length of the promo period on your new 0% card, decide a comfortable amount you’re willing to dedicate per month to pay off a purchase before that period expires, and pull the trigger. Any time you can use OPM (Other People’s Money) to buy or invest without paying a fee or interest to do so, the only decision you need to make is whether you should make the purchase at all, because the method of payment has been intelligently determined.
For instance, let’s say the promo period is six months, there is no annual fee, and you are comfortable spending $50 per month for this purchase. That means you can spend $250 – not $300, because we generally prefer to pay off the purchase a month or so before the expiration of the promo period. This is simply a buffer to allow for unforeseen circumstances that might interfere with this payment. Make the buy, pay $50 a month on it (always pay the monthly payment a few days before the minimum payment is due, and use online banking to establish the payment in advance so it becomes automatic), and have it paid by the end of Month 5 of the six-month promo period.
The idea behind this is two-fold. First, you’re continuing to establish a better credit history. Secondly, you’re learning the basics for OPM use that, down the road, can be done on a much larger scale with the purchase of asset-bolstering investments rather than a new gizmo or blouse and matching skirt.
5) Request credit limit increases on both of the first two cards you have obtained and used. This can be done on-line at the card issuer’s website, or by phone to a toll-free customer service numbers. You’re not interested in buying more stuff or more expensive stuff – that’s wrong-headed. Instead, what you want is to maximize the available credit in your name but not utilize it. That’s a key factor in establishing a great credit history that will allow you to qualify for the best-available financing on your first home, and/or maybe a car (although there are better ways to buy a car).
6) Seek out one or two more credit cards, focusing on those that offer cash-back rewards, but don’t get carried away. Applying for credit means credit history inquiries, which are a temporary hit to your credit score, so they should be kept to a minimum. That said, the small score deduction you will endure in the short run will be more than offset – fairly quickly – by having more available credit in your name, and the pay-off can add up fast if you’re able to acquire a card or two with meaningful cash-back rewards.
There are cards on the market currently offering quarterly cash-back of as much as 5% on certain types of purchases. For instance, as I write this in August of 2017, the Chase Freedom card is offering 5% back at restaurants and movie theaters. Others offer a flat rate of cash back on all purchases.
7) Use the cash-back card(s) smartly to maximize your benefit. This is very important, so please note: Do NOT start buying things you don’t need, can’t afford, or wouldn’t buy were it not for the card and its associated perks. If you typically go out to dinner once a week, for example, don’t start going six times a week. But for that typical date-night dining, use the card with the 5% back on restaurants, and be sure to pay the entire balance off before the next minimum payment is due.
Look, we are no longer trying to establish credit. You’ve achieved that already. Now our focus is to take advantage of the available rewards without paying for the privilege in the form of interest. DO NOT carry a balance!
Follow these steps, in order, and you will be a happy carrier of multiple cards, boaster of an impressive credit history, and will have paid a grand total of about $14 in the first four months for the accomplishments. Pretty shrewd, dude!
Thanks for reading.
DISCLAIMER: This post represents the author’s opinions only. In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment. Results are never guaranteed. Utilize the information as you see fit, make all money decisions at your own risk.