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4 ways to avoid annoying credit card pitfalls

It can seem a bit counterintuitive at times, but you have to go into debt a bit to become more creditworthy. Banks and other institutions don’t just want to know you have money – they want to see your history of repaying what you owe. While having and using credit cards is a necessary evil, the trick is to use them correctly.

In this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp are joined by Motley Fool analyst Nathan Hamilton, one of our credit specialists, to talk about the most common credit card pitfalls and how you can avoid them.

A full transcript follows the video.

This video was recorded on June 26, 2017.

Alison Southwick: For some people, credit cards are an evil catalyst, especially when you consider that the average person with credit card debt costs around $ 16,000 on average. But the flip side is that 60% of people pay their balance every month. So credit cards aren’t that bad. When managed responsibly, they can be a pleasant modern convenience.

And with us today, Nathan Hamilton. He’s back to talk about some of the most common credit card pitfalls and how you can avoid them. Hi Nathan! Thanks for coming back!

Nathan Hamilton: Absoutely! How are you?

Southwick: I’m genius! So, pitfall n ° 1.

Hamilton: Payment of cash advances. And for people who aren’t familiar, it’s basically using your credit card as an ATM. It doesn’t necessarily work very well with credit card debt because what happens is that there are two fees that will be charged to you. One is transaction fees. If you hate paying ATM fees, to use a cash advance you’re going to have to pay a 3% fee just to access cash. And the other part is usually you’re going to have to pay very high APR interest charges for borrowing that money and taking a cash advance.

If you look at it, it’s a huge deal for the banks. I know we’ve talked about banks before that make money off fees, but cash advance fees, when you look at the big picture of things, number 1 is you have interest charges. This is where the banks make their money. Second, the interchange, which is just a processing fee. # 3 – $ 26 billion is what banks earned in 2016 from cash advances.

Southwick: Wow!

Hamilton: It’s huge.

Robert Brokamp: Why is there a difference between the cash advance fee rate and a regular purchase? As if I was using it to Amazon or something like that?

Hamilton: If you look at it from a credit card issuer’s perspective, that’s not good budgeting behavior. When you have to use a high interest rate credit card for emergency funds, a credit card issuer will tell you, “You’re probably not going to pay on time.”

Brokamp: It’s a red flag.

Hamilton: It’s a red flag.

Southwick: So the people who use cash advances are people who may have already maximized their credit and need more?

Hamilton: It is no longer a need for money.

Southwick: Just need the money.

Hamilton: By reviewing it, your available credit limit to borrow for purchases will be higher than your cash advance limit. It’s just accessing hard cash.

Southwick: So, the # 1 pitfall is to avoid cash advances. Pitfall # 2 is …

Hamilton: It’s getting into the weeds, but paying before the statement date versus the due date and here’s why that makes sense. As of the statement date, your credit card balances are reported to the credit rating bureaus, and what happens there is they calculate what’s called your credit utilization rate. , which compares your borrowing against what you have and assesses your score based on that information.

So if you pay by the due date, your balances have already been reported. If you pay before the statement date, you get this balance at zero. A zero balance is reported to the credit bureaus. Your credit usage improves and therefore your FICO score improves.

Southwick: Now, in the previous show, when we invited you to talk about credit scores and how to improve them, you explained how you pay your bills on the 10th of the month, the 20th of the month, and the 30th of the month. Is it for this reason?

Hamilton: Not only does this help me budget and stay within my allotted limit each month, but it basically means that I report a zero balance to the credit bureaus, and from there my FICO score goes up. improved.

Southwick: And maybe you just like paying bills.

Hamilton: I love.

Southwick: Why do I do it once a month when I can do it three times?

Hamilton: I like to spend and pay bills. It’s my favorite thing.

Brokamp: I will assume that you are an organized person.

Hamilton: I am.

Brokamp: I saw your office, or what people might think of as an office …

Hamilton: A minimalist.

Brokamp: It is a table. There is nothing on it.

Southwick: You wouldn’t know that someone is actually using this desk because it is so clean.

Hamilton: Yes it is.

Southwick: What is the third pitfall to avoid when it comes to credit cards?

Hamilton: This is the one where you need to look at the fine print when you apply for or use a credit card. But a balance transfer period is missing for the promotional APR. So, for balance transfers, some cards will be lenient and say you can transfer the balance at any time. We offer you the 0% APR for 15 months. Others will say, “You can only do this during this 60 day period from the opening of the account. [a bunch of legal disclaimer stuff in italics and a small font] that you must meet to get that introductory 0% APR. So it’s about paying attention to the details.

Don’t fall for this trap because if you look at balance transfer cards I’d say half of them have these random requirements.

Brokamp: I know some of the requirements that were there before – I haven’t paid that much attention to it lately – but you also had to pay everything exactly on time, so if you did the balance transfer and you miss one payout, then you’ve basically lost that teaser rate.

Hamilton: I don’t know how it works now, but I know there is [been] various legislations [passed] which came after the financial crisis who was more of a consumer advocate, and they removed some of those more stringent regulations. I’m not sure what the exact plan is right now, but I really want to review it because if you miss a payment you are hurting your FICO score.

Southwick: And probably anytime you do a lot of credit card ju-jitsu, you’ll probably want to read all of the fine print as closely as possible.

Hamilton: The funny thing you look at when you go through all the details of the credit card is the amount of legal language there. Qualifying balance transfers or new cardholders eligible for the promotion period asterisk. There are all of these details, but luckily they are presented in a standardized format that is fairly easy to understand.

Southwick: What’s the fourth and final pitfall that you suggest people avoid when it comes to using credit cards?

Hamilton: This is going to sound strange, but I recently learned this based on research that I have come across in the market. It’s paying the annual membership fee. So, some credit cards let you get away with zero dollar annual fees. There is essentially no charge to have the card. Others charge an annual fee. But if you call your credit card company, they’re more than willing to waive these fees if you’re a good cardholder.

And the research I’ve come across is that 80% of people requesting fee waivers for their annual fees have been granted so it’s not a small number and I’ve never done it before, but I know full well that I will be calling all the card companies I have right now.

Brokamp: Try!

Hamilton: On the podcast.

Southwick: What are the lowest annual fees versus the higher fees you encountered in your research?

Hamilton: For a top notch card, it will cost several hundred dollars.

Southwick: Oh, this is no joke.

Hamilton: There are cards that cost between $ 450 and $ 550 based on some cards currently on the market. For more daily consumer cards, they cost between $ 50 and less than $ 100.

Southwick: So to make it give up – it’s to take you to the dinner money.

Hamilton: Just like I don’t like paying bills, no one likes paying fees.

Southwick: Exactly. So if our listeners want to learn more about how to best manage your credit, you can head over to Fool.com/creditcards. We also have listings like the best credit cards for travel rewards or cash back, or if you want to move some of those big balances. We don’t judge. We will find you great deals with 0% APR credit cards. But again, read the fine print.

Nathan, thanks for joining us again! It was fun and I learned a lot.

Hamilton: Thank you!

Brokamp: Me too!

Hamilton: Great!

Southwick: It’s a big problem when you learn a lot. M. Smarty Money pants.

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