Ah, plastic. The sweet, double-edged sword of credit cards continues to wreak havoc on consumers everywhere. On one side, the ability to spend beyond what our bank account currently holds helps us feel safe from unexpected financial harm and enables us to act like big shots at restaurants. On the other side, the creeping disease of unwieldy consumer debt can destroy our peace of mind and financial security. Yowser.
How can we get a handle on credit cards? A little common sense and a bit of homework. We’ve culled these questions from our overflowing e-mail bag and our message boards, hoping to provide a little clarity for the savvy consumer. And who’s savvier than you?
Question One: Should I float a balance?
I’ve heard that creditors like customers who hold credit on their cards because that is how they — the creditors — make money. Should I pay off my credit card each month if I can, or should I just pay the minimum?
It’s an evil game, this credit card business, and encouraging us to hang on to a balance is one of the techniques that the folks at Big Banking use to make sure that they make as much money as possible on our tendency to spend. However, as a general rule, it is always a good idea to pay off your balance.
For most of us, paying an additional 17 percent for a meal we ate four years ago with a guy who’s name we can’t remember is a dumb idea. At the end of the day, you really only get penalized for poor credit. Continue to pay your bills off on time, and you should always be able to find a credit card that meets your needs. Especially these days, nervous financial institutions need good customers more than ever.
Question Two: How many cards?
I want to limit the number of credit cards I have. How do I decide which ones to keep and which to get rid of?
Good for you. Start by doing a side-by-side analysis of the costs and benefits of each card. Get your monthly bill, find your magnifying glass, squint gently and crunch the numbers. In addition to the interest rate, be sure to jot down the many fees associated with each card. (Better do it sitting down, the exercise can cause the blood to rush from your head.) On the plus column, make a note of any benefits that the cards offer that are actually beneficial, like cash back offers and frequent flyer miles. (This list will be far shorter, I assure you.) This will help you determine which cards are sucking you dry the most. Begin your vetting process by eliminating all high-cost, high-interest cards first and rolling over your balance to the cards with the lowest interest rates and best ancillary benefits. Be sure to check for any restrictions or fees too; these folks are pretty crafty that way.
Question Three: Should I consolidate?
I have an offer to transfer my credit card debt to a new card at 0% interest. Should I consolidate my debt?
You should consider consolidating if your other cards have extremely high interest rates or if the zero rate will last long enough for it to really make a difference in your financial picture. Sadly, these zero interest rates are great in theory, but are problematic in practice. Often the low rates are a glorified “bait and switch” routine — you become excited to consolidate all your debt onto a new card, only to have the great low rate disappear in a few months and a much higher one arrive in its place (plus hidden fees). At the end of the exercise, you might wind up with one card, a higher total balance and a much higher interest rate than the one(s) you had originally. Bummer. Read the fine print on the credit card offer