When it comes to financial products, none is so changeable and possibly confusing as credit cards. Interest rates, due dates and agreement terms can change with only a few weeks’ notice to the cardholder. And if you get fed up with one card and cancel it, your credit score may be depressed. So how can cardholders make the most of their situation?
We’ve assembled seven good moves for cardholders to make this year in light of changes in the credit card business, new products and the economic conditions in the country. Here’s what you should do in the coming year:
Switch to a card with rewards
Like the majority of cardholders, you probably still use the card you’ve had the longest time. A study by MasterCard revealed that nearly three-quarters of cardholders still had the same credit card 15 years after they got it in college.
Most likely that card doesn’t have rewards or a cash-back component. If it does have rewards, you might be paying an annual fee to be enrolled in the program. Or it might be an airline card on which you’ve been piling up points for years but have never gotten a free ride.
Your best move for 2008 is to switch to a new rewards card.
“Consumers need to take a look at a card they’ve had for a long time,” says Curtis Arnold, founder of CardRatings.com. “You can do better and avoid the hassle of redeeming miles, expiration dates, ticket fees, blackout dates.”
You can compare cards online using Bankrate’s search engine.
“Most consumers think it’s a big hassle to do. That’s not really so,” Arnold says. “It’s a matter of going online and applying. It takes five minutes now. You’ll have the card in five to 10 business days.”
Arnold says cardholders should leave the other account open for credit score reasons. And he notes that you probably shouldn’t switch if you’re close to reaching a goal with airline points. “Assuming you don’t have a lot of points banked, it’s an easy process,” he says.
Before you get a card for a rewards program, be sure to check out the details and think about how you’ll actually use the rewards. For example, if you only travel during the holidays, it may not pay to have an airline rewards program because often those dates are blacked out or few seats are available for rewards. And most airline cards carry an annual fee.
Last year, many of the credit card issuers, like American Express, pumped up their rewards programs to offer experiential rewards and concierge services to help cardholders book concert tickets or get a special dinner reservation.
But Arnold still thinks the best bet for rewards is cash back.
“I prefer cash-back cards for several reasons, not the least of which is simplicity. With cash-back cards, there is no need to worry about the actual value of your rebate, redeeming points for airline tickets, gift card expiration dates, choosing expensive merchandise out of a catalog, etc. I like the KISS — Keep It Simple Stupid — method and think the easier and simpler a reward program is, the more likely consumers are to effectively utilize the program.”
If you find a rewards card from the issuer of your current card, you can ask the card issuer for a product change and it won’t be considered a new credit card account, even though you’ll have a new number.
Of course, if you carry a balance from month to month, the interest you’re paying on the loan will eat up any cash rewards you have earned. Plus, reward cards often have higher annual percentage rates than regular cards.
Redeem your points for rewards
If you have a rewards program, use those points! MasterCard says 40 percent to 60 percent of points never get redeemed. Are you one of those who are piling up points? If you currently have a rewards program, you should go online and see what you can buy for the points you currently have, then do it.
“Don’t hold on to points. You never know when they’re going to change the program or devalue points,” says Arnold. “To hedge against that risk, it’s not good to bank points for a long time.”
Citibank and some other card issuers are making it easier to redeem points. “Citibank launched the CashReturns MasterCard this year,” says Arnold. “In terms of rewards, it’s not the most sexy card out there. The beauty is that you get a reward check automatically when you hit, say, $50 in rewards. An actual check is sent to you. That’s pretty rare these days. You can keep up with your points without going online or making a call. Who’s got time to follow points?”
Pay off the balance
Most Americans have more than one credit card, and 60 percent of cardholders carry a balance from month to month. If you’re a balance carrier, make a commitment to pay off the loan in full on at least one of your cards and then retire that one. With the average interest rate at 14.9 percent, you’ll be saving a lot of money each month by not paying interest on that balance.
“The thing we recommend first and foremost is to start with the cards with the highest interest rates,” says Nick Jacobs, a spokesman for the National Foundation for Credit Counseling in Maryland. “While you’re doing this, don’t put more stuff on the card. People have a tendency to keep piling on while they’re paying it off.”
If you have several cards with balances, you might think that transferring them to one card would be a good strategy. But Jacobs says: “Think twice about consolidating on one card only because you’re not really getting ahead on anything — you’re taking little debts and making one big one.”
For consumers who can’t pay down a card at one time, Jacobs suggests paying more than the minimum “so you’re getting ahead and not just running interest.” Bankrate’s debt pay down calculator and calculator for the true cost of paying the minimum can help you tackle your credit card debt and get on the path to fiscal freedom.
Shop for a card with a better rate.
Since the prime rate has declined after the Federal Reserve cut the federal funds rate twice this past fall, annual percentage rates on credit cards are declining, too. Now is a good time to look for a new card with a lower rate. It might also be worthwhile to find a card with no annual fee.
“With the Fed decreasing rates, there’s no need for you to be paying 10 percent in interest,” says Arnold. “You’re doing yourself a disservice.”
Credit card issuers aren’t just going to lower your rate, though.
“The consumer has to be the initiator,” says Arnold. “We advise, every six months, looking at your rate and calling to see if you can get a lower rate. Usually they’ll do it if they think they’ll lose you as a customer.”
With the cost to replace you as a customer running around $300, this is one time when the cardholder is holding the cards.
“Hopefully you’ll get a lot more bang for your buck from the card — that’s the goal,” says Arnold.
You can follow this script when you call your card issuer to make asking for a lower rate a cinch.
Read the monthly statement
Credit card issuers are notorious for changing the cardholder agreement, due date or mailing address on the monthly statement. Often the change is contained in a stuffer that you think is a piece of junk. In 2008, get in the habit of looking at each piece of paper in the monthly statement and checking the details on the statement, too.
In 2007, several House and Senate committees held hearings on credit card practices and disclosures, and the Federal Reserve also made some suggestions for improvements.
“The Federal Reserve is looking at how statements are structured, to make it easier to understand,” says Arnold. “I think you’ll see some changes. Citi is overhauling the look of their statements, to make them more visually attractive and written in simple English. These trends are starting to emerge — changes that are beneficial to consumers.”
And if one issuer is simplifying their statements, expect others to follow.
Check your credit report
At Bankrate, we tell readers constantly to check their credit reports — all three of them. According to a study by Javelin Strategy & Research, 60 percent of consumers hadn’t checked their credit report in the previous six months.
“It should be more frequent,” says Bruce Cundiff, senior analyst at Javelin. “Consumers are allowed a free one each year. We advise to get them in four-month intervals — Equifax in January, TransUnion in May and Experian in September.”
Not every lender reports to all of the credit reporting agencies, so the information on each bureau’s report may be different. That’s why you need to check all three.
“Everybody should check their credit report. It’s a financial statement just like a banking statement,” says Rod Griffin, a spokesman for Experian. “You need to know what your lenders are saying about how you pay your bills. It’s also a great tool for identifying fraud or identity theft. If there’s nothing there, fine. But if you see something, you can act on it. You have a right to know what’s in your credit report and you should.”
“Many consumers see the value of credit monitoring services. And there is definite value in that,” says Cundiff. “The primary value is to detect fraudulent activity relatively early. We generally find that consumers are not held liable for fraudulent charges, but it’s a major hassle to sort out.”
When you check your report, you will probably find errors such as your name spelled two different ways or a former address where you’ve never lived. You can correct these errors, and you should. And certainly if there are more serious mistakes — such as a report of delinquency when you know you’ve paid — you must start the correction process. It’s up to you to keep your credit reports accurate.
Curb spending with a debit card
Debit card use has outpaced credit card use over the past few years, and that trend continues. In 2007, U.S. cardholders were expected to make 26.6 billion debit card transactions and 24.4 billion credit transactions, according to the ATM & Debit News EFT Data Book.
Using a debit card instead of a credit card is a “great step, because it’s coming right out of your bank account when you spend it. You’re feeling the effect. You know you’re spending it instead of spending on a credit card and being surprised when the statement comes,” says Jacobs.
But there are a few things to keep in mind before you swipe at every turn.
“The downside of using a debit card is spending your money instead of getting a float. There’s usually at least a 15- to 20-day float on a credit card,” says Cundiff.
He also warns about banks authorizing a transaction that will put you over the amount in your checking account. “People need to understand the policies of their financial institutions. They need to read the fine print on overdraft protection. A bank should be responsible for protecting the consumer, saying, ‘No, you don’t have any money, you can’t make this purchase.'”
Instead, overdraft protection kicks in and the consumer continues spending, not knowing that they’re being charged additional fees to cover each transaction.
The bottom line, Cundiff says, is “controlling spending by controlling spending, not by the method of payment.”