They Gave Us Money

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This is a guest post from Logan Abbott, a personal finance expert and blogger. He’s also the editor of MyRatePlan Credit Cards, an authority site for comparing credit cards online.

 

5 Tips To Keep In Mind When You Apply For A New Credit Card

 

Almost every time I open my mailbox, there’s a few credit card offers stuffed in there from American Express, Chase, Discover, and other credit card companies. I’m sure your mailbox is no different. Well, when you decide you need a new credit card, I’m here to tell you that applying for the first offer that comes to you through snail mail is not the right way to go about getting the best card for you. Although many of the offers claim that you are “pre-approved,” this isn’t always the case, and can end up harming your credit score if you apply for too many cards and keep getting denied. In addition, you can find much better offers online that are tailored to your spending habits.

 

Here are five tips you should keep in mind when you’re looking for a new credit card:

 

  1. Apply for a credit card that you know your credit score will allow you to be approved for. Many times, people begin applying for credit cards willy-nilly without realizing that each time the credit card company checks your credit score, your score can actually be decreased. This means you want to apply for a card you know you will be approved for. To do this, I recommend ascertaining your credit score first using services such as Credit Karma or Equifax. Once you know your score, you can ensure that you apply for a card that you will be approved for.
  2. Figure out if you will be carrying a balance on your new credit card. Credit card companies make most of their profits by charging interest on unpaid credit card balances that their cardholders carry from month to month. The best way to avoid paying interest on your balance is to make sure you pay your balance in full each month. However, this isn’t always possible, so if you will be carrying a balance, you want to make sure that you have a credit card that offers as low of an interest rate as possible to keep interest charges low. In addition, many cards, such as the Discover it Card, offer a long introductory period where you can carry a balance for up to 18 months without being charged interest.
  3. Be wary of fees. Different credit cards have different fees associated with them. The main fee that people fail to take into consideration is the annual fee that the card requires. Even if the card offers great rewards, if the fee is several hundred dollars per year then chances are you will not earn enough rewards to offset the cost of owning the card. In addition, many cards charge balance transfer fees and foreign transaction fees, so if you are planning on transferring a balance or making a lot of purchases overseas, you should pay careful attention to the fine print when applying for a card.
  4. Know your spending habits to capitalize on rewards. Many credit cards offer rewards programs in the form of points, airline miles, and cash back for purchases. Some cards offer more rewards for purchases in certain categories, however. To this end, if you spend a lot of money on gas, for example, you want to make sure that you apply for a credit card that offers generous rewards for purchases at gas stations.
  5. Get a good overall idea of the card. Credit card companies are known for confusing customers when it comes to the fine print associated with a credit card. Before making a decision on which card to apply for, ensure that you’ve reviewed every facet of the credit card from the fine print, to the fees, to the rewards, to any other terms that may be unfavorable to you. There are great credit card offers to be had, but it takes a bit of homework in order to get the best one for you.

37 Ways Credit Card Issuers Are Screwing You Over

Everyone knows that Yap Islanders use giant round stones for money, but no one ever mentions how freaking stupid it is.

Everyone knows that Yap Islanders use giant round stones for money, but no one ever mentions how freaking stupid it is.

 

Ha! Title bait!

The experts say to use provocative headlines, preferably ones that confirm people’s preconceived notions. And people do love to whine about credit card issuers. The experts also say that “list” titles draw lots of attention. There aren’t 37 of anything in this post, but there are plenty of examples of how you can use a credit card to your advantage.

Credit card issuers don’t screw anyone over. Seriously, they’re among the most honest businesses out there. Unlike some auto manufacturers and investment banks, no credit card company we know of is peddling influence in the White House or on Capitol Hill. The next time we at Control Your Cash hear of a credit card issuer truly shortchanging a customer will be the first. (If there’s something we’re missing, tell us. That’s what the comments section is for.)

Why the bad rap?

Because of the monthly statements. And the human propensity for blocking out disagreeable things. You buy things on the card all month, your wallet doesn’t literally get any lighter, and when the bill arrives you see your expenses added together and presented in boldface. For most people, spending $20 on dinner is no big deal. Doing it 15 times a month and having to pay $300 at once is.

Imagine if you received a monthly statement listing the total number of times you used profanity. Or the amount of alcohol you consumed. Or for the fellas reading this, the total number of sexual thoughts you had about the women you come in contact with every day. Once those totals are tallied, and printed, they can get sobering.

Not evil

How do credit card issuers make their money? 

When I was a kid, I couldn’t understand it. You pay the same amount you’d pay if you’d used cash, but you don’t have to settle up for a month? What’s better than that? Who’s the fool who invented credit cards, and how much money is he squandering on this idiotic idea? I only hope credit cards are still around by the time I reach the age of majority, and that MasterCard doesn’t realize the error of its ways and go out of business before then.

It never occurred to my 9-year-old head that people might not pay their bills in full by the due date. Nor that AmEx and VISA know this well, and use it to their advantage.

If you don’t like credit, don’t use it. If you can’t handle it, ditto. Many people take the position that credit card companies are out to take advantage of us. They aren’t.

The little-known profit center

Most merchants would prefer you pay cash, because credit card issuers charge the merchants a fee (we’ll call it 2%, on average) when you use a card.

So why would any business take cards? Because every business takes cards.

It’s become a cost of doing business. Hilton Hotels could probably save a little money in the short term if they didn’t put soap in their bathrooms. But unless Carlson Companies followed suit, people would flock to Carlson hotels rather than carry their own soap on the road. Carlson would adopt the slogan “We’ll leave the dispenser full for you®,” and Hilton would lose business. Soap is a necessary expenditure, just like credit card merchant fees.

Not every business takes cards. But every business decision-maker has to answer this question – “Is it worth it to raise my prices a little, if doing so will make it more convenient for customers to buy my products?” Most businesses will say yes.

There are exceptions. A very small business – e.g. the fruit stand at the weekly farmer’s market – might not bother to set up an account with a credit card issuer. It’s easier for such a business to insist on cash only, though that might mean forgoing the occasional sale. Besides, the fruit stand’s prospective customers are each only going to be spending a few bucks anyway. If the fruit stand routinely made hundred-dollar sales, and thus had customers who don’t typically carry enough cash to cover a purchase – it’d probably accept credit cards.

Small, transitory, and casually licensed businesses aren’t the only ones that refuse credit cards. Peter Luger Steakhouse in New York is famous for only accepting cash. But after so many years, Peter Luger’s insistence on cash is practically part of its decor – like the gray-haired waiters and the oak paneling on the walls.

Send me your money

The vast majority of credit card issuers’ income derives from interest payments, paid by cardholders who refuse to pay their balances every month. (Estimates among the four major credit card companies in the United States – American Express, VISA, MasterCard and Discover – put interest payments and late fees at around 75% of total revenue.)

On top of that, there’s that transaction fee charged to merchants.

The latter is more politically palatable, and less visible to government regulation. That’s why Congress passes laws capping interest rates, but cares little about transaction fee rates: monthly credit card statements are tangible, they’re occasionally shocking, and everyone gets them. Meanwhile, transaction fees are hidden in every purchase. In fact, they’re hidden so well that most consumers don’t think twice about them, and assume that there can never be a difference between the price a retailer charges when you pay with a credit card, and the price a retailer charges when you pay cash. Those transaction fees might be a smaller revenue source than interest payments are, but transaction fees depend less on consumers’ sense of responsibility. If people started paying their bills on time, those 2% transaction fees would become more critical to credit card issuers’ bottom lines.

How can I use this to my advantage?

Most retailers charge the same price for an item whether the customer pays via cash or credit card. (If a credit card issuer charges 2%, and the customer’s buying a $1.50 coffee, it’s hardly worth it to give the customer 3¢ off. Plus you’d have to be fairly cheap to ask for such a discount.)

But with big-ticket items – and even something like a tank of gas can qualify as a big-ticket item these days – paying with cash instead of a credit can indeed save you that 2% fee.

Gas retailer ARCO is notorious for this, also charging an additional 35¢ flat fee for credit card purchases. For most of us who don’t live in Oregon or New Jersey, the convenience of self-serve means it’s not worth walking into the store to pay cash and save the 35¢ fee.

Nominally, that 2% is paid by the retailer. In practice, the issuer passes the fee on to you. Ideally, this is a capitalist transaction in which everyone benefits – the issuer gets its fee, the retailer attracts business by letting you pay with something other than inconvenient cash, and you gladly (even unconsciously) pay a small premium for the privilege of not having to carry cash.

Oh, and just pay your balance on time. It makes life so much easier.

How We Paid Off $0 In Credit Card Debt

 

 

Our target audience. This is going to end so badly for them. That being said, the one without the syphilitic sores is kind of hot.

Our target audience. This is going to end so badly for them. That being said, the one without the syphilitic sores is kind of hot.

 

By not incurring any.

Fine, 4 words probably don’t constitute a regulation blog post. But there’s got to be something we can do to distinguish ourselves from (and discourage you from following the examples of) the galaxy of personal finance bloggers who do nothing but chronicle their debt. (“One woman’s journey/one man’s journey/one couple’s journey/one family’s journey from debt to freedom.” And it’s always a “journey”, which is as close as most of these people are ever going to get to a vacation. Or at least a vacation that they didn’t finance with a credit card and spend 20 years paying off.

The old saw is that an ounce of prevention is worth a pound of cure, but our calculations show that 16:1 isn’t anywhere near the size of the ratio between the benefits that accrue from the prevention of paying your freaking bills on time and the cure of minimum monthly payments, bankruptcy, or burying one’s head in the sand.

Like most people of our vintage, your bloggers first got credit cards when we were in college. (It was our parents who grew up in an era when credit was something consumers sought out, rather than the other way around.) Come to think of it, American Express didn’t even seem all that concerned about whether we’d reached the age of majority.

(Note: It’s amazing that today you can, for instance, overhear a person offhandedly give their name or even their phone number to someone, then use your mobile device to find out where that person lives, where she works, how many kids she has and what her friends’ and pets’ names are.

But in the pre-Internet Age, what you could conceal was every bit as impressive as what you can uncover today.  You could get a speeding ticket in one jurisdiction and never have any court on the other side of the continent find out about it. You could avoid people for days on end, and blame it on having a landline only and no answering machine. And you could lie about your age and get a credit card with very few questions asked, if any.)

That original Royal Bank VISA card is long gone, but fondly remembered as the most significant totem of the entry into adulthood. Certainly more than a driver’s license. They give those to adolescents.

The first items bought with that card included…groceries. And little else beyond that. Using the card was more of a challenge than anything else: Is it possible to swipe plastic in place of cash whenever possible, and not scream in horror when the statement arrives?

You know how kids are better at picking up languages than adults are? Maybe this is a similar phenomenon, because there isn’t an 8-year-old in the world who thinks about financing purchases of candy and Pokemon stickers.* But adults will rationalize their revolving balances with whatever excuse you give them. “It’s the holidays, I’m not Scrooge.” “It’s only $15 a month, it’s not like I can’t afford it,” etc.

If you can’t pay cash for it, you can’t afford it.

Who doesn’t love a blanket statement like that? The implied second half of the proverb is that it refers only to consumer goods. Basically, anything where 14.99% annual interest is impossible to justify.

No one expects you to pay cash for a house: the opportunity cost is too great. Why spend a decade or longer saving up for the price of a house when you can borrow the money, at significantly less interest than credit cards levy, while simultaneously not having to pay rent? If you’ve got the down payment available and the credit history (see above), it makes perfect sense.

You shouldn’t have to pay out-of-pocket for a hostile takeover of a plastics manufacturer, either. Just put up $15 million or so of your own money and borrow the remaining $850 million. The company itself is an asset by our definition, in that it’ll generate income under the right conditions.

But the purchases that result in people snowing themselves under with credit card debt are usually moronic and wasteful. Yes, we understand that you want to impress your new love interest by eating at that Mobil 2-star seafood place instead of Red Lobster. And that $150 for two (including varietal house wine per the maître’d’s recommendation) is going to get you somewhat closer to sex or a more intense if equally superficial level of companionship. But there’s still the business of the monthly statement. And our research has shown that balances are a lot easier to pay when they’re smaller.

Decades later, with more income, we’ve adopted the curious habit of not living like college kids. We have real furniture, for one thing. And trucks, with thirsty gas tanks. We even have satellite radio subscriptions, tool kits and health insurance, all of which goes on the credit card. And you know what? We still pay it off in full every month. It’s the craziest thing. It’s almost like we read the cardholder agreement, saw what we’d be in for if we didn’t make our payments on time, and decided to act responsibly.

Once again: Doing smart things is important if you want to build wealth. Avoiding stupid things is at least as important.

COMING NEXT WEDNESDAY: How We Paid Off $0 in Student Loans.

 

*Is Pokemon still a thing? Or did it die out 14 years ago? How about Beanie Babies? Ah, the pleasures of being childless and not having to stay on top of juvenile consumer trends.