Cash back? Check. Airline miles? Check. Reward points? Check. Better credit? Definitely check! These are all rewards you can expect to reap from properly using credit cards with reward incentives. However, use it unwisely and you could end up with shattered credit, a mountain of debt, and little to no rewards. Follow these few rules, and you just might sitting in first class while flying halfway across the globe…for free!
Understanding Annual Percentage Rates (APR): the APR of your card is the interest rate expressed in a yearly term. What many may not know is that a credit card typically applies differen APR for different types of transactions. Of these transactions, purchases, cash advance, and balance transfers are the three most popular. Purchases normally have the lowest rate while cash advances normally have the highest rate. Ever since Credit Card Act of 2009 came into effect, any payments exceed the minimum due will be applied to the balance with the highest interest rate first.
Payments: the most important rule of managing your credit card is to pay your balance off every month, and on time! While many credit cards offer amazing rewards in exchange for a large volume of transactions, they are usually loaded with high interest rates. If you fail to fully pay off your balance, you’ll end up paying large amounts of interest, cancelling out any freebies that you have earned. Late payments will cost you around $30 dollars or more in late fees, can cause an increase in interest rates, and lower your credit score (which means higher interest rates on future loans too). Most if not all credit cards possess a grace period; if you pay off your balance in full within this period, you wouldn’t have to pay a penny for interest. Follow these rules and can forever avoid paying interest and late fees while watching your credit climb steadily.
There are many perks of using a credit card in many categories.
- Security: most cards, if not all, offer zero liability protection and 100% coverage from certain unauthorized charges. Some cards even have some really cool extended benefits such as damaged or stolen item protection, product extended warranty, account monitor & alert, and etc.
- Rewards: different cards offered by different institutions and vendors have various rewards to give customers incentives to use the card. These rewards can come in forms of redeemable merchandise or airfares. Cards with cash back rewards usually have a set percentage of the purchase amount; that percentage may varies among different retailer categories such as gas station, grocery store, drug store, and etc. Cards with reward options typically have a slightly higher interest rates than cards that do not have rewards. Reward cards also tend to have higher qualification requirements and an annual fee. If you are a big spender that always pay off the balance of every statement cycle, a rewards card won’t cost you much. Instead, you can profit substantially from these rewards.
- Other Perks: some credit cards even offer some really nifty perks such as price protection, satisfaction guarantee, roadside assistance, discounts are selected retailers, car rental protection, baggage protection; the list goes on. Check with your bank for special offers.
- Convenience: credit card transactions can be easily verified and tracked with the monthly statements or online banking. It’ll come in handy when you try to return or exchange goods after losing your receipts. Moreover, it will make your life a whole lot easier when trying to balance your spending at the end of the month.
Beware: read the fine print on your credit card terms. It is important to know the different APR’s of each transaction, credit limit, and when payments are due. Additionally, many cards oftentimes come with an annual fee along with various other charges and stipulations. Generally, reward cards will have an annual fee ranging from twenty to a few hundred of dollars. Good news is, many also offer an annual fee waiver option if you reach a prerequisite such as a minimum monthly expenditure or minimum number of purchases within a given period of time. In this case, knowledge is power and knowing these little details can help you avoid paying more than you should for your card. With an increasing number of identity theft cases, everyone should view his or her credit report at least once a year. For free credit reports, simply go to www.annualcreditreport.com and get a full report from one of the three credit bureaus: Equifax, TransUnion, and Experian. Everybody is entitled to a free report from each of the three bureaus every year, that means you can get up to three free reports a year!
While you should limit the number of cards you have, it is beneficial to have more than one. Experts recommend having anywhere between two to six cards depending on your financial situation and ability to keep track of your finances.
- Having multiple cards allows you to have different reward incentives. Some cards may offer you a discount at a retailer while others may build airline miles for you. Additionally, you can have a low or zero interest card where you can transfer any existing balance you may have.
- Increase your level of safety by having a credit card specifically for online shopping. By doing this, you can minimize the risk of online identity theft because it will be easier to detect fraudulent activity limiting the damage.
- Having different cards enables you the most flexibility when shopping. For example, some retailers may not accept Discover, while another vendor may only accept American Express (Costco). It will be beneficial for you to have a few different cards to maximize your ability to pay
- It may be difficult to keep track of all your credit card statements every month. Develop a system that will help you remember the different deadlines and balances of each card you use.
- While you should close cards that you don’t use, closing multiple cards at the same time may look bad to the credit bureaus. Try to spread these actions out over a period of time
Recent Card Act Changes
Many recent laws have been released to help protect consumers from fine print and hidden catches:
- Credit issuers cannot raise the rate on existing balances unless you paid late by 60 days or more. If the 60 day tardiness does trigger the default rate, the lower rate must be restored once the cardholder demonstrates ability to make payments on time (usually over 6 months). Rates usually cannot be changed during the first year of issuance, and promotional rates must last 6 months.
- Issuers need to notify customers about key contract changes 45 days in advance. This includes most major changes that will substantially affect the customer, including rate increases. However, your issuer may cut your limit without any prior notification unless the reduction would trigger a penalty.
- Issuers may not charge overlimit fees unless the consumers allow the creditor to approve overlimit transactions. Additionally, the overlimit fee may only be charged once per billing cycle.
- Credit applicants under the age of 21 now need to either prove an independent mean of income or provide the signature of a co-signer. This law was meant to protect young adults who lack the ability to handle a credit card from putting themselves into heavy debt.
- The new Credit CARD Act stipulate that creditors must apply the cardholder’s payments to balance with the highest interest rates first
- Credit card companies must now issue your statement 21 days before it is due, as opposed to the previously required 14.
Do it Right!
Credit cards can be the best tool for young adults with new credit or individuals recovering from bankruptcy; conversely when used incorrectly they can prove to be costly and troublesome. Exercise responsibility by charging only as much as you are able to comfortably pay off every month. Read the fine print regarding the terms and conditions of your card so you don’t end up getting riddled with fees and interest payments. When deciding which cards to get, shop around and make an educated decision based on the benefits and costs of each offer. Again, doing it right will lead you to stellar credit enough airline miles to fly you around the world.