A credit card can be a powerful spending tool. After all, what other payment method offers points, miles or cash back on your purchases. Or useful ancillary benefits, like an extended warranty, price protection or car rental insurance. Unfortunately, without a credit card payoff strategy, you could land in big financial trouble. If you spend more than you can afford each month, you’ll wind up carrying balance — and that interest will add up quick. Fortunately, if you keep balances non-existent (or very, very low), know what rewards you’re entitled to and time your purchases right, you can leverage the benefits of a credit card without falling face first into debt. Let’s talk credit card strategy.
1. Borrow Cheaply
Interest rates are creeping up on all types of loans, but introductory low-rate credit offers are still out there. You may have received these offers in the mail:
0% for six months!
3.99% for the life of the transferred balance!
0% financing for one full year with a major home improvement purchase!
Some consumers successfully use these low-rate offers to consolidate debt, pay college tuition, or even to pay off more expensive home equity lines of credit.
Of course, you have to watch out for the traps, which include fees of as much as 5% on a balance transfer, and rates that skyrocket if you make a payment even one hour late. Also, keep in mind that maxing out a credit card can lower your credit score, resulting in higher rates on other credit card balances you carry. So, take a lower rate when you can, but tread carefully. If you’re opting for a 0% introductory APR offer, be sure to pay any balances you transfer or new purchases you make off before that introductory rate expires. And, if you routinely carry a balance, look into a low-interest credit card, which, by definition, touts a more affordable APR.
2. Play the Float
Banks and insurance companies play the float all the time — and a credit card offers an opportunity for you to do the same. Charge a high-ticket item on your credit card and pay it in full when the bill is due. Time it right and you could get nearly two months interest free. Find out when your credit card issuer’s billing cycle closes (call customer service or check your previous statements) and then make your purchase right after that date. The charge won’t appear until next month’s bill, and depending upon the length of the grace period, you might luck out with a good healthy float.
This strategy does not typically work if you are carrying a balance on your credit card. Virtually all credit cards use the average daily balance method including new purchases to calculate interest. That means you don’t get a free ride on new purchases if you start the billing period with a balance.
Another way to play the float is to take advantage of interest-free financing. Let’s say you buy a $3,000 flat screen television with 0% financing. If you park that $3K in your high-yield savings account at 4.5%, you’ll have $135 at the end of the year. Watch those monthly payment and final payment due dates carefully, though. If you slip up, you will get hit with a hefty finance charge – maybe even all the way back to day one.
3. Rack Up Rewards
If you want travel rewards, free movie passes, or even cold hard cash, just pull out the plastic. There are rewards to suit just about every interest. The challenge becomes picking one! If you carry a balance, understand that the interest rate may be higher than what you can get elsewhere, so a rewards credit card may not be right for you. And watch out for strings attached to the rewards, such as minimum purchase requirements, blackout dates for travel, or caps on the amount you can earn.
Once you’ve found a card you like, you may find yourself using it for all your purchases. That can be rewarding – and addictive — so make sure you don’t overspend just to earn rewards.
4. Shop Safely
Credit card purchases are backed with the protection of federal law. Under the federal Fair Credit Billing Act, you have the right to dispute a charge if you make the purchase using a credit card and the merchandise you order is not delivered, or if it is not delivered as agreed (wrong color, wrong item, for example) or even if it was not delivered as promised (the flowers guaranteed for delivery on Valentine’s Day show up two days later).
To dispute a billing error on your credit card, you must follow the rules, though. Picking up the phone to complain is not enough! Here’s what to do:
- Write to the credit card issuer at the address for “billing inquiries,” not the address for sending your payments (the address for billing inquiries is often found on the back of your most recent monthly statement); include your name, address, account number, and a description of the billing error.
- Send your letter so that it reaches the credit card issuer within 60 days after the first bill containing the error was mailed to you. (You may also be able to file a dispute online.)
- Send your letter by certified mail, return receipt requested, so you have proof of what the credit card issuer received. Include copies (not originals) of sales slips or other documents that support your position. Keep a copy of your dispute letter.
When you do, the credit card issuer must acknowledge your complaint in writing within 30 days after receiving it, unless the problem has already been resolved. And the credit card issuer must resolve the dispute within two billing cycles (but not more than 90 days) after receiving your letter.
While the item is officially under dispute, you can withhold payment on it. But you must pay any amount not under dispute and/or pay your regular minimum payment. The credit card issuer cannot take any legal or other action to collect the disputed amount and the related charges (including finance charges) during the dispute.
Debit cards do not carry the same protections, though your debit card issuer may offer assistance in a matter you cannot resolve with a merchant. One more warning: billing error protections don’t offer help in the case of buyer’s remorse.
In addition to billing disputes, you also have the protection of federal law if your credit card is lost or stolen and used by a thief. Your maximum liability for unauthorized charges is $50, and most card companies won’t even require you pay that amount. Technically there is no time limit for disputing unauthorized charges, but the sooner you do so, the easier it will be to resolve the matter.
Plus, unauthorized use doesn’t typically cover an unauthorized purchase by someone you lent the card to.
5. Build Your Empire Wisely
Spike Lee is just one of many people who have followed his dreams and started his own businesses using credit cards. Plastic is usually a lot easier to get than a bank loan, especially for a start-up venture. But that easy credit has its downside. With a large line of credit on your Visa or MasterCard, you may be tempted to spend money on things not essential to your business. (Do you really need four-color letterhead and the latest computer?) If finances charges rack up faster than revenues, you’ll soon be in trouble.
The better strategy is to start your business on the cheap, and use credit cards only as needed. When you do use plastic, choose a business credit card reported in the name of your business rather than on your personal credit. You’ll protect your credit rating from the additional debt and you will be setting up your venture as a serious entity rather than a side hobby. (Keep in mind, though: While an issuer may not report your business credit card use to the consumer credit bureaus, they generally require a personal guarantee — meaning you’ll be personally liable for the debt and can be sued for payment, should you default on the account.)
6. Save at the Car Rental Counter
Your $10-a-day car rental can easily mushroom into $30 a day if you buy the “protection” coverage the rental car company will try to sell you at the counter. The “Collision Damage Waiver” is technically not insurance, but it works like insurance in that it covers you if the vehicle you rent is damaged.
The good news is that between your own car rental coverage and a CDW waiver benefit on your credit card, you may be able to turn down that pricey policy. Check with your own auto insurance company first to see whether your coverage extends to rental cars and what the gaps may be. Then check with your credit cards to find out which ones offer free CDW coverage. Many will, and while that coverage is secondary to any insurance you have, it will likely pick up deductibles that aren’t covered by your auto insurance. You must use the card that offers the coverage when you rent the car, so make sure you carry that card with you when you travel.
See Where You Stand
To be sure that you are getting the best rates on your credit cards, check your credit score today using Credit.com’s free credit report snapshot tool. Create an action plan to help pay down debt and get matched with credit cards that offer the best rates and rewards for your credit score. Checking your own credit reports and scores does not affect your credit score in any way and no credit card is required to apply.
Jeanine Skowronski contributed to this article.