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Al Duncan PictureIn Plastic We Trust: 4 Keys to Smart Credit Card Use
by: Al "The Inspiration" Duncan

With a credit card here and a credit card there…here a card, there a card, everywhere a credit card. Old MacDonald had a card. E-I-E-I Oh my God! This has gotten out of hand. Most people, especially college students, are constantly being swarmed with credit card offers.

When is the last time you received a credit card offer? Yesterday? Last week? Or maybe it was sometime within the last month.

Did you know…

…that the average household receives around 8 credit card offers per month?

And that’s nothing compared to the amount of offers college students receive. According to research, the average college student receives 15 credit card offers per week via snail mail, email, and various promotions (i.e. being offered a store credit card during check out). That’s more than seven times the number of offers received per household.

With all of these credit cards all over the place, it’s easy to understand why 76% of undergraduates have at least one credit card. The problem is- the vast majority of credit card holders blindly accept credit card offers. Smart credit card use requires…

1. Awareness

Know why you’re getting it, what it’s good for, and the consequences of poor usage.

These are the primary things that credit cards are good for:

*Helping to build credit history
*Emergencies
*Necessities

And of course…

*Niceties. Like a flat screen or a hot new outfit, right? WRONG.

I’m not saying that you need to wear corny clothes and bobo’s (that’s what we call no-name sneakers in Philly) but you want to read the rest of this article before heading off to the mall.

CREDIT HISTORY

Consistently making your credit card payments on time can help you to establish a good credit history which will increase your credit score over time.

The highest credit score you can have is 850; the lowest is 350. Above 700 is considered excellent. Lower than 500 is considered poor. The better your credit score the lower your interest rates will be on loans and future credit which means that, in the long run, you’ll owe less money. Your monthly mortgage payments and car note will be lower.

EMERGENCIES

Emergencies are self-explanatory. If a piano falls on your head and you need to buy some pain medicine, that’s an emergency.

NECESSITIES

Just because something is important to you doesn’t mean that it’s a necessity. But here’s a tip: If you have to ask whether or not something is a necessity, then chances are it isn’t.

CONSEQUENCES

Make sure that you’re aware of the consequences of poor credit card usage. This is where I failed miserably.

When I received my first card during my first semester in college, I wasn’t aware of anything about credit cards other than knowing that I could use them to “get stuff now and pay later.” I found out, in painful fashion, that pay later really means pay MORE later!

I maxed out my first card in about 10 days (predominantly buying stuff I didn’t need and a few text books) and I didn’t have the money to make the payments.

Dumb.

Within two weeks of receiving the first card, another company sent me a card. I maxed out that one in 10 days, too. How? Buying more stuff I didn’t need (clothes and fast food) and trying to use cash advances to make payments on the other card!

Stupid.

Within in 90 days of getting my first credit card I ruined my credit and had to drop out of school because of debt.

Idiot.

Did you know…

…that university administrators complain about losing more students to credit card debt than academic failure?

Because more and more organizations and institutions are doing a credit check on candidates, excessive or delinquent credit card debt has been known to lead to job and professional school rejection.

Family conflicts, difficulty renting apartments, loan denials, physical and emotional health problems, and, in extreme cases, even suicide have all been attributed to excessive credit card debt.



The way to avoid scenarios like the ones I just mentioned is to practice…

2. Delayed Gratification and Impulse Control

Practice delayed gratification and impulse control to develop your money smarts.

We live in a “broadband” society. Everything is about high speed. Everything is about “now”. (Except for hard work- people always want to delay that, right?)

As a result of this mindset- in all facets of life, not just finances- delayed gratification and impulse control have become seldom seen phenomena. And that is a shame because many a debacle in life is caused by impulsive behavior.

How many times have you made a spur-of-the-moment decision and regretted it later? How many times have you gone to the store to get one thing, but ended up coming back with three or four things? Maybe you even came back with something totally different.

For most people, the first thing they do when they get more money is spend more money; the more credit they have available the more they charge.

People with money smarts have a different philosophy. The more money they get the more they save and invest. And the more available (unused) credit they have the more they are prepared to deal with emergencies.

DELAYED GRATIFICATION

Delayed gratification is the marriage of discipline and patience. It is the ability to distinguish between temporary fun and permanent consequences. Know that you will avoid a lot of problems and frustrations in all areas of your life by mastering delayed gratification.

To master delayed gratification you must:

*Understand that it’s simple, but far from easy to master this skill.
*Identify your most important goals and values.
*Constantly ask yourself: “How might this action or decision impact my goals and *values? Am I okay with that now and in the long run?”
*Practice delayed gratification often, even on minor things, until it becomes second nature.

IMPULSE CONTROL

Impulse control is the triumph of logic and reasoning over impulsive behavior. It is the ability to think clearly in the moment instead of acting blindly. Like delayed gratification, mastering impulse control is simple, but challenging because it requires you to:

*Pause in the heat of the moment and think of the ramifications of your actions and decisions so that you can make a wise choice.

You want to control your impulses before and after you get a credit card. Have you ever been in a store and they offered you a chance to receive a discount on your purchase by applying for a store card?

It happens all the time and people don’t even bother to read the fine print. It’s love at first sight. They fall in love with the plastic. They just impulsively sign up and then impulsively start purchasing things. Not good.

Did you know…

…that all new credit cards will have the words “In Plastic We Trust” stamped on them?

I’m just kidding. New credit cards may not have those words stamped on them, but those words are stamped on the minds of many credit card users.

At a business networking event one night, a college-age entrepreneur tried his best to convince me that his available credit was a part of his net worth.

Absurd.

Since when did credit become synonymous with cashflow? And when did debt become synonymous with asset?

To become more finacially literate and avoid any confusion about the terms, conditions, and usage of your card you want to do some…

3. Research and Choose Wisely

Shop around; know the terms and conditions before accepting a credit card offer.

I’ve come to the realization that a lot of times people don’t know what’s going on and they don’t want to know what’s going on… until it’s too late. As long as it’s easy and they can have what they want, that is good enough… until there’s a discrepancy.

Therein lies the self-imposed problem when it comes to credit cards. You have to know what’s going on if you’re going to get the best rates, be able to use your card to your advantage, and not get smacked with all kinds of fees you didn’t know about.

Did you know…

…that according to R.K. Hammer Investment Bankers, a California credit card consulting firm, banks collected $14.8 billion in penalty fees in 2004?

How many enraged customers do you think called up their credit card provider saying things like -- “but I didn’t know anything about those fees.” or “I didn’t know my APR was going to go up that high.”

When I got my first card in college, I was one of those enraged customers. But it was my fault and being angry didn’t make the bill any lower.

Once again, you want to know ahead of time.

You maybe surprised at how much terms and conditions vary from card to card. You can find out what you need to know, however, by reading the fine print and the Schumer Box or Disclosure Chart – the chart on the application that summarizes the main terms and conditions for the card.

Many people make the mistake of only going over the Disclosure Chart so they miss out on other hidden charges and transaction fees until their statement arrives in the mail. Read the fine print.

ANNUAL PERCENTAGE RATE (APR)

The Annual Percentage Rate is the amount of interest you pay based on the balance you carry on your card. Your APR could be any where from a reasonable 7.99% all the way up to an outlandish 29.99%!

The national average is around 15%. The average for college students is around 17%. The APR on my first card was 23.99%. Ouch.

When you’re reading the fine print take notice of whether or not they’re offering you a fixed APR or a variable rate, which is not good. Find out if it’s an introductory rate that is going to go up after six months. Also, find out if your APR will increase if you make a late payment.

By the way even with a fixed APR, you should know that credit card providers can still raise your rate. In some cases this could happen with as little as 15 days notice!

Tiered pricing is something you definitely want to be on the look out for. This anti-consumer practice denies you your right to know. A company sends you a range of possible APR’s such as 8.99%-18.99%. Once you’ve applied, the company then uses your credit history to determine your APR.

Did you know…

…that you can negotiate with your current credit card provider for a better APR? Call them. Tell them you want a lower APR. The better your history is with them the better your chances.

ANNUAL FEE

Some credit card providers charge an annual fee for the usage of their card. If your credit is good, you can find a credit card with no annual fee.

CREDIT LIMIT

This is the maximum amount of credit that you can charge to your card. According to research, 50% of all college students max out their credit cards. So be sure to choose a limit that you know you handle responsibly. You only want a limit high enough to take care of necessities and emergencies.

SECURED CREDIT CARDS

This is a card where you are required to put down a deposit that equals the amount of your credit limit. As long as you are responsible with your card(s) you won’t ever need a secured card. These cards are typically used by people with poor credit.

TRANSACTION AND PENALTY FEES

There are all kinds transaction fees that could be charged to your card. Cash advances, balance transfers, quasi-cash transactions – like buying lottery tickets – are some, but not all, of the types of fees you could incur.

Penalty fees include late payments and over-the-limit charges. Over-the-limit charges are HIGH. You might be wondering, “How can you charge more than your limit?”

One way people end up over the limit is by maxing out their cards and then receiving transaction or penalty fees at the end of the billing cycle. I was in serious pain when I started getting hit with over-the-limit charges on my first card.

If possible, you want to avoid transaction and penalty fees completely. These are the things that can cause you to end up paying $600 for a plane ticket that originally cost $300. Not cool.

GRACE PERIOD

This is the amount of time you have before interest begins to accrue on your purchases. The typical grace period is about 25 days. Paying off your balance before the grace period is up will save you money.

CASH ADVANCE

I messed up my second credit card by taking out cash advances to make payments on my first card. And a few times I took out an advance just so I could have some cash in my pocket. By the time I realized how much extra the advances were costing me it was too late.

Moron.

Unless it is an extreme emergency, NEVER get cash advances with your card. A cash advance is an immediate cash loan from your credit card. The APR on cash advances is higher than your normal APR, there is usually a transaction fee involved, and typically there is no grace period.

Once you’ve done your research and chosen wisely, this next key is…


(continued in part 4)


Sources:
Undergraduate Students and Credit Cards in 2004:
An Analysis of Usage Rates and Trends
The Nellie May Foundation

Variables Influencing Credit Card Balances of Students at a Midwestern University
Lucretia Mattson, Kathleen Sahlhoff, Judith Blackstone, Blaine Peden, and Abraham Y. Nahm