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.
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.
"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.
3. Avoid Paying Forever
Many card holders accommodate the issuers. They extend their debts by doing what the card companies love: They pay the minimum. That's usually less than 3-4% of the total debt. Paying the minimum lets issuers generate lots of interest before that principal is finally paid off.
For people making minimum payments, it is going to take decades to pay off credit card debts. In fact, if you were to owe $2,500 on an 18% interest credit card, and you were only paying the minimum 3% payment, it would take you 180 months (or 15 years) to pay off your debt. You would also end up paying an additional $2,298.98 in interest charges. In this vicious cycle, principal is barely touched each month, which means most of what the cardholder is paying is interest.
"This is perhaps the most critical step in paring down credit card debt - by adding money beyond the monthly minimum, you're effectively paying down what you owe rather than simply paying interest," writes Jeff Wuorio in the CNBC Guide to Money and Markets.
4. Paying a Little Adds Up to a Lot
Let's take our above example again: you have $2,500 on a credit card with an interest rate of 18%. You only pay the minimum amount and you're looking at 15 years of debt repayment. But let's say becoming a total free rider is still too difficult for you. If you were to add $10 to the minimum payment each month, your debt would be paid off in only 40 months and you'd only pay $822.28 in interest! That's still not a free ride, but it's a significant improvement over paying the minimum.
5. Don't Play the Loser's Game
Whether you exploit a credit card's monthly grace period is within your control, but if you start using credit card checks, there's no way to win. Blank credit card checks are unusually sent to cardholders unsolicited in the mail. There are many reasons to run from this form of credit: there is no grace period, you pay interest on this loan the minute you use it and these checks often carry a very high interest rate, even higher than the APR on your account. When you receive these checks, there is only one thing to do - immediately tear them up.
Who Doesn't Want a Free Ride?
By following just a few of these tips, you can save yourself bundles of money and piles of bill invoices. If you follow them all, you will be on your way to a free ride from your credit company.
Remember: Don't get mad, get smart.