Sunday, 10 February 2008

Tips on credit card use, Part 2: Optimized use and safe shopping experience

This post continues the three-part series on tips related to opening, using, and closing credit card accounts. The second part deals with optimization of credit card use and relevant safety considerations.

Credit card use:
  1. Always remember that credit card is not the same thing as cash. It is not money, it is just a convenient short-term credit tool that allows you to consolidate your payments and delay them for 20-50 days. Never run up a credit card debt and never use your credit cards to finance your consumption.

  2. Remember that credit cards do NOT increase your long-term real purchasing power; only your labor earnings, other monetary income, or realized investment gains do so.

  3. ALWAYS (try to) pay your credit card balances in FULL when due. Keep in mind that the main value of a credit card is that it gives you a free short-term credit and conveniently consolidates and delays your payments to some specified future date. Once you start accumulating the regular double-digit interest on your balances, you are in trouble. Compounding can do wonders if you apply it to your bank deposits and savings, but it can sink you into debt in no time if you run up your credit card balances.

  4. If you cannot pay your credit card balances in full, then ALWAYS make at least a minimum payment. Skipping a payment or making a late payment damages your credit history. If you do it once or twice accidentally because you just forgot, then it is OK, but if you do it several times and it becomes a pattern rather than an exception, then your credit score will take a big hit.

  5. Do not own too many credit cards. One MasterCard, one Visa, and possibly one American Express is all you need. Some people, in addition to 5-10 MasterCards and Visas, also have a dozen of retailer specific cards, but you have to ask yourself honestly if carrying them all around and occasionally using them at relevant stores gives you any substantial benefits.

  6. Whenever you can, always take advantage of a free short-term credit that your credit card conveniently provides. Remember that this is the key reason why you should be using your credit cards. By timing your large purchases relative to credit card statement dates, you can effectively extend your free credit period to almost two months. How does it work? Aside from a standard 24 day grace period, you also get extra 20-30 days of free credit when you time your large-sum purchases. For example, if you know that your regular balance payment dates are on the 25th-26th day of a month and your balance closing dates are therefore normally around the 1st-2nd day of the month, then you can make your large purchase immediately after your statement closes, so that the resulting balance is paid on the 25-26 day of the next month. The relevant interest savings and/or opportunity cost savings can be substantial if you, say, are paying for an expensive durable item worth $500-10,000 and more.

  7. Preferably have two credit cards with statement dates that stand two weeks apart from each other. In this case, you can use your cards interchangeably depending on which statement date has just passed. The rule of thumb is to use a credit card for all purchases after its statement date until the statement date of the second card, then switch for the next two weeks, and so on. By using this approach, you are adding extra 15-30 days to your interest-free credit periods.

  8. Apply for and use credit cards that give you cash or bonus-point rebates or at least collect air miles. For example, I use a PC Mastercard which accumulates bonus points equal to 1% of card balances and redeemable at Canadian stores selling PC brand products. Since I regularly shop for groceries at RCSS and occasionally at NoFrills and Loblaws stores, this card is very convenient to me. Annually, on my PC card related balances I get a discount equal to $200-250+, which is not bad at all.

  9. Use your credit card whenever and wherever you can in order to receive bonus points or cash rebates. Limit your cash and cheque purchases to a bare minimum. Try to increase the ratio of credit card spending to total purchases and expenses as close to one as possible PROVIDED that you FULLY pay your monthly credit card bills.

  10. Use your existing credit card to get discounts on time-limited promotions and sales from retailers and service providers PROVIDED that they offer something that you really need to buy.

  11. Do not use your credit cards for cash advances. It is prohibitively expensive and the compounded interest starts accruing from the moment you make a cash withdrawal or complete a balance transfer.

  12. Keep in mind that the interest on balance transfers gets paid first, so if you happen to take advantage of an attractive promotional balance-transfer interest deal, make sure that you do not have any unpaid balances related to previously made purchases. The idea behind using low promotional interest on balance transfers is to make minimum payments over a promotional period and save on interest costs. If you have an existing balance of unpaid purchases, keep in mind that your payments will be first applied to your balance transfer amounts, and it means that in a month you will start accruing double-digit interest on unpaid balances related to regular purchases.

  13. Most credit card providers conveniently "forget" to mention that you promotional low-interest balance transfers are also subject to a cash advance fee that normally ranges from 0.5 to 2% of transfered balances (plus there is a minimum cash advance fee feature as well). Once you add this fee to your "low, low" balance-transfer interest rate, the promoted deal may look not that attractive anymore. Therefore, alway read through small-font items at the bottom or the back of your promotional offer.

  14. If you know that you cannot pay fully for a purchase when a credit card payment becomes due, then do not make such a purchase. Never use debt to finance your consumption – it is the straight road to the eventual insolvency.

  15. Never make impulsive purchases, especially the ones that exceed your sensitive spending limit, say, $100. If you see a thing that you think you really need, write down its price and go home without buying it. When at home, write down at least ten reasons for and ten reasons against buying this item. Compare them. Ideally, let several days pass before returning to a decision to buy a product or service. Then revisit your pros and cons list. Be as much skeptical as you can be when making a final decision. Play a devil’s advocate against yourself. Ask your friends or relatives about their opinion on a purchase of the desired item, but make sure you pick the most skeptical and critical people as your advisors, so that the bias is on the no-buy side. If you still convinced yourself into buying a product, then look at the item again when you are back at the store and give it the last thought. Think of any extra reasons you may not like the product and then make a final decision.

  16. One of the strategies to limit impulsive shopping is to use a rule of an X-day-delay. For example, set a rule of never making a non-regular purchase on a spot, but delay your decision to, say, two weeks. If you never thought about the product or never needed it during this period, there are good chances that you do not really need it at all. Do not buy such a product.

  17. If you find yourself sinking fast into a credit card debt and your monthly balances keep accumulating without going to zero, you urgently need to develop a disciplined strategy of resolving the issue. The strategy involves several steps. First, you need to stop all new charges to your credit cards. You will not use them again before you fully pay off all outstanding balances, so put them away. Do NOT apply for new credit cards, even if they offer you promotional interest on balance transfers. Second, you need to identify which purchases and expenditures need to be cut off from your monthly spending, so that you can use the freed cash to pay off your credit card bills. Third, you need to start making at least minimum regular payments on your outstanding balances. Fourth, use all available free cash to make extra payments on your credit card accounts. Get a second job to help you paying off your credit card debt faster. If it is available and is not maxed out yet, use a lower-interest credit line to reduce your credit card balances. First apply extra payments to the account with the highest effective interest rate, then switch to the account with the second highest interest, and so forth. Finally, never ever again use your credit cards to finance your consumption. Do not spend more than you earn. If you do, then re-evaluate your income-spending patterns.

  18. Always keep your receipts for large-sum purchases, so that you can return or exchange the product later. When buying a product, ask a sales associate about a retailer’s return policy, default warranty, and a price-guarantee policy. Write down this information and store it, along with your receipts, in a designated place, such as a special file folder for receipts. If something is wrong with the product or you want to return it or if you see it on sale one week later, you can always use your receipt to return or exchange the product and/or get a refund on your credit card.

  19. When you receive your credit card statement, always go over all posted transactions and inquire your bank about the transactions that you do not recognize. Remember that there is a grace period after your statement date, during which you can dispute a questionable charge and/or cancel a transaction.

  20. Use online banking to pay for your credit card balances. Set a payment date at least two or three business days before your credit card statement date, as there may be delays in processing times and as a result you can miss your payment deadline.

  21. Use your credit card online statements as inputs for your budgeting and financial planning. Most financial institutions allow you to convert your statements to one of popular personal finance software formats, such as MS Money.

Security considerations:
  1. Never respond to email messages asking you to update your account information. If there is a problem, the bank will contact you by mail or by phone. If contacted by phone, ask about the identity of a calling person and call him/her back using the official phone number on the back of your credit card plus an extension of this person.

  2. Do not use your credit card in retail places that you do not trust. A crook can record your card information or can double swipe your card to scan it electronic code to use it for an identity theft fraud. Representatives of certain ethnic groups are more likely to be involved in such fraudulent schemes, so be extra careful when paying with your credit cards in such ethnic neighborhoods. That is one of the few examples when carrying a small amount of cash rather using your credit card may be beneficial to you.

  3. Do not use your credit cards for online purchases on websites that do not have enhanced security and encryption features.

  4. Do not save or enter your credit card or banking information and passwords on public computers (for example, those located in internet cafes or airport terminals) or on computers that are not properly protected by firewall, anti-spy, and anti-virus software.

  5. Do not input your credit card information and passwords on computers belonging to other people – it is possible to use keylogging software and certain Internet browser settings to retrieve the inputted information, including passwords.

  6. Record your credit card information (account number, expiration date, and customer service phone number) in a safe place so that you can use it promptly to report a lost or stolen credit card. Record a summary of such information for all credit cards sitting in your wallet and take it with you on a trip, but keep it separately from your wallet (and credit cards).

  7. Do not carry all of your credit cards with you if you do not need them. Use and carry just one or two.

  8. Create a good password for access to your online statements. A good password has both capital and lower-case letters and numbers and does not contain full words. Do not use names and birthday dates of yourself and your significant others (including pets :-)) as passwords.

  9. When you move to a different address, make sure that you notify your credit-card provider about your address change. Otherwise, they may continue sending convenience checks and replacement cards to your old place where somebody can use them for an identity theft fraud. It especially applies to accounts that you thought have been inactive or closed. Double check that your old credit card accounts are closed before you move to a new residential location.

The third part of this series discusses a few tips on how to properly close your credit card account.

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