To all you angry
credit card customers out there, don't get mad - get smart.
Learn a few tricks of the trade to avoid paying extra fees and make the credit companies work for you. Do this and credit card big shots will hate you and call you a free-loader, but also grudgingly salute you in private, hoping that few people imitate your sage actions.
1. You Ride the Train, But Never Pay
Here's the secret. This is a strategy constantly advocated by financial advisers: Pay off credit cards expeditiously and entirely each month. Never go beyond the
interest-free 30-day grace period. Then you will be taking what the card company executives sneeringly refer to as a "free ride" - you get to use their money without paying them anything for the privilege.
Do this one little thing and you will save thousands, maybe tens of thousands, of dollars in needless interest payments. You will also stop card companies from hiking your
interest rates for missing a payment or for holding too many cards with big balances. The latter can raise your risk profile and destroy your
credit rating. (To read more about credit ratings, see
Credit, Debit And Charge: Sizing Up The Cards In Your Wallet and Take Control Of Your Credit Cards.)
In fact, if you pay within the grace period, you have the upper hand over the card
issuer. That's because you, as a free rider, will force the card company to provide a 0%, short-term loan. That's a terrible deal for any issuer in an era of perpetual
inflation and
fiat money. The issuer is gambling that a large number of customers will spurn a free ride and make them millions by carrying a balance. Don't be one of them. (Find out more about this in
The Best Way To Borrow and Can You Live A Debt-Free Life?)"Card companies hate free riders," writes Howard Strong, attorney and author of "What Every Credit Card Holder Needs to Know" (1999). He says that credit card companies privately refer to people who pay their full balances as "freeloaders" or "leeches", and privately "dream of the day when the free ride will be eliminated."
For issuers, the best-case scenario is for card-carrying customers to have credit balances month to month. The official industry terminology for them is "revolvers".
2. Shut the Revolving Door
Others might call these revolvers "poor fish". That's because revolvers subsidize free riders. The free riders pay
nothing in interest, but revolvers pay through the nose.
According to 2006 statistics from the Federal Reserve Bank of Philadelphia, 40% of credit card users paid their balance in full each month. This suggests a high percentage of revolvers. There are other ways that card companies make money, for example, via balance transfers, checks and the like, but getting most clients to carry credit balances from month to month - the bigger the better - is the primary way card companies get people deep into debt.
Carrying a balance is incredibly important to credit card companies and dangerous for you. Why? Because when you carry credit balances at high lending rates, the
compounding effect of money works against you. Instead of money producing money for you (as it does in a good long-term investment when appreciation and dividends are considered), big credit balances are a boon for the credit card companies, which often use complex, confusing formulas to get the highest rates. They are delighted if it takes a long time for a client to pay off a debt. (Keep reading about compounding in
Understanding The Time Value Of Money and Overcoming Compounding's Dark Side.)
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