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Thursday, October 23, 2008

Make Credit Cards Work for You

BOSSY's Poverty Party So this is me, jumping on Bossy's poverty party. Haven't heard of her poverty party? She's got folks gathered up to share tips and tricks, commiserate, and generally help each other out at this time of financial uncertainty. There are lots of ways that the Husband and I could be better about managing our money. We are not good about closely monitoring the money that's in our 401K plans. We've been known to sit on money I make from extra teaching for months before finally deciding where to invest it. (Hint: the non-interest bearing checking account where my paychecks get direct-deposited is not the best place.)

But one thing we are good at is managing our credit card debt.

Since I know a lot of people struggle with that, I thought I'd share three "tricks" we've used to help keep that debt under control. They're easy, and they've saved us thousands of dollars in the long run.

(1) We have a gas-station affiliated credit card for gas purchases. Ours is a Visa card through BP. I don't know if other gasoline companies offer similar deals, but I'd guess they might. The BP card, though, is a steal of a deal. It has no annual fee, and it initially gave us 10% cash back on all of our gas purchases. Now that's down to 5%, but every little bit helps, right? It also gives us 5% back on some restaurant and other purchases, but we use it almost exclusively for gas. Every time our rebate hits $25, our statement has a notice saying so. The hoop is that we have to go online or call to request a rebate check -- a step I bet some people are too lazy or forgetful to take. But not me. I never forget free money. We get about $100 every 3 months from them. That's $400 a year for doing nothing more than being vigilant about going to the gas station we prefer anyway and using the right card to spend the money we'd be spending anyway. You can use that money to pay down other bills. We do.

(2) We apply for a store-affiliated credit card when we have to make a big appliance purchase. Unfortunately the refrigerator doesn't care if times are tough, and if it dies, it has to be replaced. Shopping around for the best selling price is easy, but did you know that you should also shop around for the best payment method? Even if the store isn't currently advertising it, most stores that sell appliances (from Home Depot to Sears to your local appliance mart) have store credit cards. And most of them will offer "six months same as cash" deals if you ask. That means you have six months to pay off the item without paying any interest. We've gotten these cards at several major stores. The trick is this: As soon as I get the first credit card statement, I go immediately to my online banking and set up a monthly automatic withdrawal: 1/6 of the purchase total every month for six months. That way, we don't pay for the whole purchase up front or, even worse, pay for it on our regular high-interest credit card and then pay an extra $150 or more in interest. If you don't pay off the item before the six months is up, however, you're on the hook for ALL of the interest for the whole six months, so be very very careful that that last payment gets there in time. (Can you tell we moved into a house that was built in 1978 and had to replace nearly all the appliances in the first year we were here?)

(3) We beat the card companies at their own game. What is their game? you ask. Interest. They make all their money by charging you interest on your purchases. Often, the minimum payment on a credit card balance is the same as -- or sometimes even lower than -- the interest that has accrued that month. This means that if you make the minimum payment every month, you will never ever ever pay off your bill, and that's just what they want. The best way to defeat this is to pay less interest every month so that more of the money you send goes towards paying off the actual debt itself. There are two ways we've reduced the interest we are paying:

* We call the company, and ask them to reduce our interest rate. Seriously. This actually works. (Admittedly, it works best if you have been paying them regularly at least the amount of the minimum balance.) You will be in the best negotiating space to get this reduced interest rate if you have sitting in front of you one of those offers that comes through the mail asking you to apply for a new card that will give you 0% interest for six months on balance transfers. Tell your current company that you are thinking of switching to the other company with the better interest rate, and THEN see what they can do for you.

* If they don't dramatically reduce your interest rate (or even if they do), don't be shy about transferring a balance anyway to a new account you open at 0% interest. Even in the present "credit crunch," we still get a few of those offers in the mail every week (down from a few per day, but they are still out there). It might seem counter-intuitive to open a new line of credit when you can't pay off the old one, but here is why it's smart.

If you are carrying $10,000 in credit card debt, then you could easily be accruing $150 per month in interest on your regular cards. If you consolidate that debt onto an interest-free card and pay only that "interest" amount of $150 per month for six months, you will have saved $900 in interest, and decreased your debt to $9,100. If you always try to pay a little more than the interest payment, in order to reduce your debt, then your principle will reduce even more if you have six months to chip away at it.

Husband and I did this to pay for our wedding. Just a year out of graduate school, and with a new house in the mix, we didn't have any money saved for a wedding because we'd spent it all on a house down payment. So we applied for a 0% interest card and put all of the wedding expenses onto it as we encountered them. We paid as much as we could afford to pay every month. When there was a balance left at the end of six months, we transferred that balance to a new 0% interest card, and we made ourselves pay all of it off before the end of six months. Don't get me wrong: this wasn't all easy. We had nearly a year of "budget months" where we hardly ever went out (we entertained friends at home instead), we brown bagged our lunches to work, we didn't buy things that were unnecessary (including new electronics or clothes). But we did it.

You can buy yourself a reprieve from the grind of interest by consolidating the balances from multiple cards onto an interest-free one. Then, put everything you can towards paying off that balance every month (including the rebates from your gas card, right?). As the interest-free period comes to a close, search for the best deals on interest rates you can find. Then talk to your new company and your old company, and see who will give you the lowest rate for the next six months. Make them fight for your money. You will win by having much lower interest rates.

PLEASE NOTE: Your credit rating will suffer if you endlessly shift balances from one card to another and don't pay them off. But if you made purchases on one card, make only one shift of balance to another card, and then pay that balance down, your rating will actually get stronger, since you're getting yourself out of debt.

PLEASE ALSO NOTE: I am not a financial planner or an expert in anything money related. I'm a literature professor. The suggestions here are simply things that have worked for my family to help us manage credit card debt.

Now, all I need is someone to bully me into show me how to begin managing the money my employer puts into my retirement account. Anyone got good tips for that?

8 comments:

Anonymous said...

Hmm--I never thought of getting a gas card and earning 'rebates' for buying gas--I might give this a try! Of course, I'm sure it's one of those things that only works if you are vigilant with paying the balance every month...

Momo516

catnip said...

I'll have to consider getting a gas card, thanks for the tip.

I used to move my balance around to different cards, but they always hit you with a transfer fee and it can be a lot if you don't read the fine print. I finally just paid everything off with a home equity line of credit. One payment and the interest is tax deductible.

Maybe I need to do a similar post!

Tara R. said...

I have never thought about your #2 tip... I like it though. We have some major purchases coming up and that is a great idea. Thanks for sharing!

BOSSY said...

Interesting. Bossy always thought store credit cards were a bad idea. But maybe that's because she never wanted to cut them up after the purchase of the big-ticket-item because: Cute Boots!

Ree said...

ALL excellent tips, sweetie. I, too, love the gas card thing. I need to get Shortman a pre-paid one, and soon. Since he drives my car more than me!

We do those no-interest purchases, too. In fact, $200 left on my Sears Kenmore washing machine!

Auds at Barking Mad! said...

I think the hubby has been trying to talk me into getting a gas card for just this very reason. I guess I might just start listening!

Wonderful post MT!

Momisodes said...

Great tips! I've also noticed that Citibank cards will give 5% cash back on gas and grocery purchases (our biggest expenses). And as you mentioned, I am TERRIBLE about checking my cashback balance.

I would also love to know more about what to do with my 401K. All I know is that recently we checked our balance, and I had a good cry.

Jaina said...

Sounds like stuff my mom says to me and does herself. :) The thing I really need to get on top of is my retirement benefit plan, my own IRA and a high yields savings account. I keep meaning to...

 

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