Chapter 5

Using a Credit Card Wisely

Using a credit card wisely means planning when and where you'll use it. More than anything, avoid using your card for impulse purchases. These images fill credit card ads on TV and elsewhere; but a spontaneous Christmas gift shopping spree is the worst use of a credit. Another good thing to avoid is...anything your card issuer tries to sell you. Credit card companies work hard to offer all kinds of products and services to extract money from their customers. Take credit card theft insurance, for example. You don't need this. If your card is stolen, you're only liable for a maximum of $50 worth of purchases.

Debit Cards

We've mentioned debit cards in several places-and will in several more, later. So, these cards are worth a mention here. They can play a role in the smart use of credit cards. Beginning in the 1990s, Visa and MasterCard convinced most banks to "co-brand" their ATM cards as debit cards carrying either the Visa or MasterCard logo and a similar account number. This arrangement meant that ATM cards could be used at bank cash machines and like general-purpose credit cards at stores, hotels and restaurants. Debit card sales aren't credit sales, though. Essentially, the sales are like electronic checks-they result in a direct debit from the savings or checking accounts to which the cards are connected. When debit cards first came into wide use, some financial experts warned that they posed bigger risks than traditional credit cards. In some cases, banks didn't apply a credit card's $50 liability limit to debit cards that were stolen or used fraudulently. But more recent banking industry practices and government regulations have extended the $50 limit to debit cards.

Balance Tranfers

Credit card issuers promote balance transfers heavily in their advertising and direct-marketing offers. As we've warned elsewhere in this book, transferring credit card balances is not the same thing as paying off credit card debt-even though card companies use terms like "pay off your other cards" in their promotions. But a well-timed balance transfer can reduce your money payments, in some cases substantially. So the process is worth some mention. The key to a smart transfer is doing your homework. You may even want to create a chart like the one below to compare deals. We put together this example, assuming that you'll pay on time each month and maintain a constant balance of $2,000.

Surprise Balance Tranfers

A "pre-approved" credit card offer that comes in the mail may have an unhappy side effect. Sometimes, the fine print reveals that if you accept the offer, you must transfer your balance from a card you already have to this new card. And if you read the rest of the fine print, you'll find that the new card just so happens to have a higher interest rate than your current card. Because this information is spelled out in the offer, the automatic balance transfer is legal and you'll have little recourse if you fall for it. Consider it yet another reason to grab that magnifying glass before you accept any offer. A variation on this scheme: Some credit card issuers buy old debts from other consumer lenders and then offer "new" cards to the people in debt. If those people say yes to the new cards, they're surprised to find, on the first statement, a balance that includes the old debt.

Changing Terms

Virtually all credit card agreements contain language that enables the credit card issuer to change the terms of your agreement at any time. So a credit card with a low interest rate could have a much higher rate down the road, even if it's supposed to be a fixed-rate card. Likewise, a credit card with a long grace period can have a much shorter grace period at some point, the annual fee can rise, etc.

What to Do About Errors

If you have errors on your credit card statement, you have recourse. Under the Fair Credit Billing Act (FCBA), there are specific steps you can take to correct your account.

Chapter 5 Conclusion

Most of the best tips for using a credit card wisely are just common sense. And, really, they all boil down to two basic points: don’t use a credit card for impulse purchases; and read your statement every month. The second point is the one that trips up most people. It’s surely easier to pay the balance or minimum—or some amount in between—and move on to more interesting things. But keep in mind that errors are fairly common on credit card statements. Even if you don’t have all of your credit card receipts handy, compare as many as you have to the items listed in your statement to make sure the dates and amounts are right. Also, credit card issuers are heavily regulated. They have to publish the changes they’re making to your account…and they do this in the fine print at the bottom or on the back of the monthly statement. Most count on people not reading these notices. Don’t be that person.