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Credit Cards - The Basics
How Lenders Operate – And How They’ll Make a Tidy Fortune from the Unknowing Credit card companies might seem like immensely clever, money making enterprises that exploit every loophole to maximize the interest payments – and profits – they are taking from you every month. Nothing, however, could be further from the truth. These financial institutions operate on simple principles and exploit the fact that consumer demand and their customer’s naivety will keep business turning endlessly over. It doesn’t have to be that way, however. Know what to look out for and you can cut your overheads and stop these businesses from making a dime more than they have to. Lenders exploit the fact that people use one card for many purchases. For example, if you use a balance transfer special card rate for spending in the supermarket or mall, they deliberately structure repayments in such a way that you’ll pay a fortune on the entire balance. To properly play your plastic you need to deploy an army of cards as weapons in the war against consumer debt. Using the right tool for the right job will smash your credit card costs. If you already have hefty credit card bills, transferring the balance will usually substantially cut your interest costs. What this means is that your new provider pays off the debts on your current credit or store cards for you. You then owe the money at a (hopefully) lower interest rate for a fixed – or sometimes indefinite – period of time. The key to making this work is by not using this card for spending. What this can mean is that credit card providers will then revert the interest rate for the WHOLE of the balance up to a higher rate. Consumers who spend on a card, but don’t clear the debt each month should focus on minimizing the interest cost. Search the market for the lowest purchase rate available, but also keep in mind the day when you’ll clear the balance in full (e.g. Bonus time; when your bonds mature, etc.) and don’t let the balance spiral beyond your means. If you pay off your balance in full each month then the interest rate is irrelevant. Focus instead on the gains available from using the card for spending. The key to this is the reward scheme offered. Many credit cards offer points schemes or even cash-back. There’s a huge array of different schemes, but by picking the right one you can benefit substantially. It’s often simpler just to go for a Cashback card, where the benefits are more apparent, but sometimes reward schemes offer great inducements – particularly when they offer double points to new customers, and so on. If you’re one of those lucky people to be debt free you can take REVENGE on the credit card companies and make free dollars from their products. The schemes are simple to manipulate. If they lend you money at 0%, you can bank the cash and earn interest on it. There are a variety of mechanisms that allow you to get money into your savings account quickly and easily. Once its in, just let it sit there for the duration of the interest free period and pay it back in full when it’s at an end. Substantial amounts can be made from this, but it’s a strategy that should only ever be used by consumers with a good credit history, no debts and are prepared to make a little effort. Store cards should be avoided under almost all circumstances. They charge the highest rates of interest, and by being offered at a department store counter are an easy lure into a mine of consumer debt. You should never use them to borrow money on, and if they offer any perks and benefits make sure they work for you. For instance, some offer a 10 per cent discount on first purchases. If they do so – make sure you take them up on it when buying something big, thus maximizing your saving. As a rule, however, avoid these expensive options like a plague. Stick to a credit card that charges low interest on purchases and you’ll be fine. Some people, however, simply can’t get new credit cards. Sometimes there are quite valid reasons for this, but on other occasions it can be due to incorrect information held on your credit reference file. Apply to a credit reference company, like Experian, and check that there are no erroneous black marks on your record. Beyond that, there are a variety of simple strategies you can apply that will boost your credit score and help enable you to get the best credit cards for your needs. In a position of strength, you can then make credit cards work for you.
This article was posted on August 16, 2005
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