Credit Card Mastery
Brad Michael
Mastering your credit cards is something anyone can do when THEY DECIDED to do it.
Learning a few simple, fundamental rules can help you save money when it comes to your credit cards. Credit cards are very useful tools but must be handled with care and precision.
Credit cards are not a necessity but certainly are handy when it comes to transacting business with any retail or online business. There are literally thousands of credit card companies and they all have a selling point. All of these businesses want you as their customer and with so many competitors, many attractive deals can put money in your pocket if you know what you are doing.
Credit cards are instruments that are offered to consumers with average to excellent credit from banks and other financial institutions. These institutions rely on consumers making purchases with their credit cards and then pay a portion of their balance at the end of each billing cycle.
These minimum payments are figured as a small percentage of the outstanding balance. This balance is a loan to you from the institution which has issued your card. Credit card companies charge interest on these loan balances that are not paid in full during the 30-day billing cycle.
These interest rates are higher than a normal bank loan because a credit card loan is unsecured (there is no collateral backing the loan) and because financial institutions lose money on a larger percentage of credit card customers when they default on their balances. Because of these losses, good-paying customers are forced to pay more.
Just like many things in life; it’s not fair but that’s the way it is. When banks take on accounts that have risk, more loss will be involved. Because banks have shareholders who expect to be paid well, banks charge higher interest rates to make up for the losses incurred.
Credit card companies make billions of dollars a year on consumers who don’t pay their credit card balances in full each month. These are good-paying customers who elect to pay the minimum balance on their card instead of paying the balance in full. There are millions and millions of these good-paying customers. When they elect to pay the minimum payment they are also electing to pay interest on the remaining money still owed. This is exactly what the credit card company wants you to do. They want you to make the minimum payment amount and pay it on time. Let me give you an example
You have just received your new credit card and you have been thinking of some items you want to purchase. You are excited as you stroll down the aisles finding your bargains. Knowing you don’t have cash for these purchases, you decide to use your credit card to buy everything on your list. It’s more than you can pay in full the next month but you know you can make the minimum monthly payment and still be in good standing.
A few days go by and you forget all about the charges you’ve made. The next time you think about it is when you go out to the mailbox and you find your bill. You open it up and see your credit card balance of $725.00 from these purchases you made. You take a look at your checkbook and see that you only have $500 remaining.
What do you do?
You make the minimum payment of $30.00. You’re relieved and you put it out of your mind. What most people fail to realize is that your balance has not decreased by $30.00. The balance has only decreased by $18.00 because $12.00 went towards interest.
You go out and purchase a few more items with your credit card and your statement comes in 4 weeks later. You notice this time your balance is not $725 but $1,000 with the same minimum payment of $30.00. You pay the $30.00 but only $13.00 goes toward the reduction of your principal, which means $17.00 went towards interest.
The higher your balance the more interest you are going to pay. You do this month after month and the vicious cycle continues. If this pattern continues you can see that the balance continues to increase for three reasons:
- You are charging more to your card
- You are only making the minimum payment, and
- You are paying less on your balance because you are paying more interest.
As you can see, paying your balance in full every month is the only way to use a credit card.
By doing this, you can actually make money from credit card companies.
Credit card companies will offer you cash incentives to use their card. This means they will pay you 1-2% every time you place a charge to your card percentage, usually labeled “points” which can be redeemed for cash or merchandise.
I like to redeem my points as cash and just apply them to my credit card bill thus reducing my credit card balance. So, I am winning three ways:
- I am not paying interest since I am paying my bill in full each month, and
- I am gaining cash by charging on my card, and
- I have the convenience of using their money free for 30 days.
The credit card is convenient for me and they are paying me to use it. So using the card is a benefit to me and I am making money from the credit card company!
This scenario is the position you want to be in.
Here are some things you can do To gain the maximum benefit from your credit cards:
- Only charge as much on your card as you can afford to pay in full every month.
- ALWAYS pay your card in full every month.
- Look for a card with a cash-back feature.
- Avoid getting too many credit cards (2 cards should be enough).
- Avoid signing up for every credit card at the checkout line (“save 20% on your purchase deals”)
- If you sign up for these deals and plan to use the card in the future, apply these habits mentioned.
- Manage your account online and review all statements closely for fraudulent charges.
- Sign up for fraud text alerts on all credit and debit cards.
- Schedule your payments to coincide with your paychecks dividing the balance by the number of paychecks you will receive before the payment due date. This will help you spread out your payments making it easier to pay in full before the due date.
Good financial practice doesn’t happen by mistake. You must plan and apply good, consistent habits to ensure financial success. I wish you all the best as you gain control of your credit card spending and all of your financial matters.
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