Which May Work & Which Usually Don't?
Credit cards are important money management tools for most people. They provide a convenient and secure way to make purchases online and in stores, both at home and while traveling. Unfortunately, for many people, they are also a convenient way to run up debt. Current credit card debt averages over $6000 per U.S. household.
Perhaps, you are thinking about these issues as you open bills for this year’s holiday spending. A recent survey indicated that reducing debt was American’s third financial resolution for 2012, right behind saving more and spending less. Issuers of credit cards know that consumers are concerned about these matters. As a result, they heavily advertise “features” of their cards that they claim can help you get “more” from using their credit card or better control credit card debt. In this report, we examine which popular features may provide useful tools and which may be gimmicks to entice you to run a balance on a card and thus provide more profit to the card issuer.
Using a Credit Card Smartly
Pay off the full balance every month
Review any money management features provided by the card carefully before using them
With balance transfer offers, carefully examine all the requirements, limitation, and qualifications in the fine print.
Review your spending habits to make sure a rewards card is right for you.
Check out the credit cards offered by your credit union. They probably have the best deal.
First, a Word About the Smart Way to Use Credit Cards
Savvy consumers know that the smart way to use credit cards is to pay off the full balance each month. That way you have convenience (and earn rewards on a rewards card) but pay no interest. When you need to make a larger purchase, place it on your card with the lowest interest rate and make a payment plan to pay off the total as quickly as possible and stick to that plan. As a credit union member, your best option is probably your credit union credit card. Nationally, credit union-issued cards have lower interest rates and lower fees and usually have no annual fee. Mission Fed offers a Platinum and Classic Mastercard with no annual fees and low interest rates.
Money Management Features Provided by Cards
Many card issuers and credit card companies offer various money management features. One that has been advertised heavily and which consumer finance experts have reviewed is Chase’s Blueprint plan. This plan provides a “Full Pay” feature that enables cardholders to designate certain regular expenses such as groceries or gas to be paid in full without interest each month even if the account carries a balance. Other features such as “Split Payments” enable the cardholder to set up a trackable payment plan for charged items.
While consumer advocates have noted the ease of use of these features, there are also several red lights if a consumer wishes to avoid debt. First, using a credit card to pay for daily expenses is not recommended. It is wiser to use cash, check or debit cards for these necessary expenses that you plan to pay in full. Putting such expenses on a credit card tends to encourage consumers to carry larger balances, rather than make larger payments. A split payment tracker essentially allows you to create an installment loan for a major purchase. However, using a credit card for larger purchases such as appliances is not necessarily smart. A personal loan from your credit union, for example, may have a lower interest rate and cost less than using a credit card. If you decide that a credit card offers the best overall value for a larger purchase, then you do not need to use a particular card with a particular installment feature. Instead, use your card with the lowest interest rate (often your credit union card) and use the money management tools from the card company, your credit union, or your financial management software to create a payment schedule that you can stick to.
Balance Transfer Features
If you are carrying balances on higher interest cards, balance transfer offers that provide lower interest rates for a set period of time can be attractive. Some offers come from cards you already have and others invite you to apply for a new card. Some balance transfer offers may be a good deal, but you must carefully examine all the requirements, limitations, and qualifications in the fine print. Here are some specific things to look for.
Is there a balance transfer fee? Most credit union cards offer free balance transfers if you qualify; in the few instances where credit union cards have a fee, it is usually capped. In contrast, most bank-issued cards have transfer fees of 3% to 5% and a large majority of bank issuers have removed the fee caps. Let’s say that you transfer $3000 to a card with a 4% transfer fee; you’ll face an immediate charge of $120. You must also take the transfer fee into account when comparing interest rates; if the promised new rate and transfer fee are not significantly less than the rate on the current card, the deal probably makes little sense for you.
How long is the pay-off period for the transfer? Can you pay off the amount transferred during that period? At the end of the special rate period, what does the interest rate rise to?
Will you qualify for the transfer interest rate offered? Balance transfer offers are generally intended for individuals with very good to excellent credit. If you wish to transfer a balance because you are having trouble meeting current payments, then you probably won’t qualify. If your credit rating is just pretty good, you may qualify for a balance transfer but it usually will be at a higher rate than the low teaser rates advertised; be sure you know the rate you actually qualify for before you opt in. If you miss a payment, the interest rate rises dramatically on most cards—so be sure you know these terms before you sign on.
On a new card offer, does the introductory rate also cover new purchases? Although money management experts recommend that you not place new purchases on the card to which you’ve transferred a balance, you should only select a card where new purchases are charged the same rate for the introductory period. Other questions to consider include: Is your credit rating high enough for you to qualify for the advertised rate? Is there an annual fee for the card? What will the interest rate rise to after the introductory period? Will adding another card have a negative impact on your credit rating?
With these cards, you earn rewards with each purchase you make. Rewards can be in the form of cash back, miles, or points.
If you usually carry a balance, a rewards card may not be your best choice. Why? You may pay more in interest than the rewards you earn. In addition, rewards cards typically have higher interest rates than non-rewards cards. For example, according to bankrate.com, current interest rates on cash-back and rewards cards are approximately 4.75 – 5.75% higher than low interest rate cards.
Here are some of the items you should look at before deciding on a card.
What are your spending habits? How much do you use your credit card?a little bit or a lot? What types of purchases do you make with your card? You need to consider how long it will take you to earn a reward.
Annual fees. Many rewards cards have an annual fee. Will you be able to spend enough to earn the rewards necessary to offset the fee? Good news! Mission Fed offers a Platinum and Classic MasterCard with a free rewards program available for both cards without an annual fee.
Earnings. For a cash back card, do you earn 1%, 2% or other amount with each purchase? For other rewards cards, do you earn 1 point or 1 mile for each dollar you spend? Can you earn higher rewards for specific purchases? Watch for tiered earnings, that is, rewards that increase as the amount you spend increases. These may start out with smaller earnings until you reach specific levels of spending.
Redeeming. How soon can you redeem your rewards? What is the minimum cash back earned that you can redeem? $20? $50? How many miles or points do you need? 5000? 10,000?
Expiration. Do the rewards expire? If so, can you earn enough to redeem the rewards before they expire?
Limits on earnings. With some cards, there are monthly or annual limits to how much you can earn.
If you want a rewards card, then check out the credit cards offered by your credit union. Mission Fed offers free Mission Rewards on their Mastercards. You earn one point for every dollar you spend. You can redeem points for travel or merchandise. They do not have an annual fee.
A Little Digging Can Save You Some Dough
As you can see, various features offered by credit card issuers may help you pay down debt faster or get more out of your credit card. But you will need to do a little digging into the fine print to compare requirements to your needs and situation before you decide about any of the options discussed.
Also remember that your credit union is always happy to sit down with you and help you compare options to select what’s in your best financial interest and best meets your financial goals.
Originally published: January 2012