How To Beat The Credit Card Companies At Their Own Game … Maybe

I doubt that you carry 3 1/2 credit cards. But according to a report I saw recently, this is the national average – that the typical American carries 3.5 credit cards. I’ve also seen a study that the average American has more than $7,000 in credit card debt.

How much are your credit cards costing you?

Have you ever sat down and tried to determine how much your credit cards are costing you? If you were to do this, you might be shocked. For the sake of the example, let’s suppose you have three credit cards. One has a balance of $4000 at 18%. The second has a balance of $7000 at 19%. And the third has a balance of $3500 at 20%. This equates to an average interest rate of 19% and a total balance of $14,500.

To make things simple, let’s look at the average interest and the total balance owed, rather than the three separate cards. We’ll also assume you’d like to get that $14,500 paid off in three years. If so, you’d have a monthly payment of $531.51 and you would end up paying a total of $4634.44 in interest charges on a total balance of $14.500 or nearly 32% of your total debt.

Turning the tables on the credit card companies

If you’re tired of having to pay that much interest on your credit card debts, take heart. You may be able to turn the tables on the credit card companies – but it takes the intestinal fortitude of a cat burglar. The reason for this is because you have to have and be able to successfully manage multiple credit cards, which depending on how disciplined you are could be a problem.

Credit card “islands”

One way to turn the tables on credit card companies is to use what’s called the “island approach.” What this amounts to is using each credit card for different purchases. Different credit cards have different rewards. For example, some give you more points for groceries while others give you more cash back for gasoline. As an example of this, depending on the credit card you might earn 6% cash back on groceries, 3% cash back on certain department stores, 5% on gas purchases and maybe 2% on everything else.

While this might be a good way to use credit cards, it pays to be careful and read the fine print. One card might give you a bonus initially but you might not be able to use it to offset its annual fee. The thing is to not go out and get three cards tomorrow. The strategy over time is to have the best rewards card for each of your major purchases.

Using multiple credit cards can lead to serious pain

These different ways to use credit cards can go bad very quickly. You have to have a good track record and be sure to not overextend yourself. If you have a poor track record with credit and have a history of overextending yourself, then don’t do this. It would be like giving drugs to a drug addict – it just doesn’t work out. As mentioned previously, you need to be very disciplined to use a strategy like this. If you have a history of using credit cards in a self-destructive way, just don’t use them. For that matter, even using them correctly could be dangerous to your financial well-being.

The downside of having multiple credit cards

Did you know that any time you open a new credit card your credit score takes a small hit? Plus, if you keep a card for just a short term and don’t have any long-term cards, this reflects poorly on your credit history. If you think you’ll be buying a new car or getting a mortgage in the next few years, it’s critical that you manage your credit correctly. Problems with a credit card might not show up today but when it comes time to make that major purchase, you could be hit with a slightly higher interest rate. If you were to get a mortgage with an interest rate that’s just a half a point higher because of the way you handled your credit cards, this will literally cost you thousands of dollars in interest charges over the life of the mortgage.

Play the balance transfer credit card game

Another way to turn the tables on credit card companies is by using balance transfers. Virtually every credit card issuer today offers 0% interest balance transfer cards. You could transfer your balances on any high-interest credit cards to a new one and pay no interest on anywhere from 6 to 18 months – depending on the card you choose. The best thing you could do is use this interest-free introductory period to completely pay off your balance. If you’re unable to do that, you might then transfer the balance on the new card to yet another 0% interest card. If you were to do this with three different cards, each of which offered a 12-month 0% introductory interest rate, you could keep from paying any interest at all for 36 months. Of course, all those transfers could have an effect on your credit score.

Tips for handling a credit card sensibly

If your goal is to have a good credit score, you should probably stay away from any of these tactics. Instead, you should make sure you handle your credit card(s) responsibly and here are four tips for doing that.

• Use the card only when you have to. Never think of a credit card as some sort of magic wand you use to pay for those “fun” impulse purchases.

• Monitor how you use the card. If you have multiple cards, put a reminder on your computer or smartphone to make sure you make all of your payments on time. Missing just one payment could throw you into a higher interest rate. The same holds true if you were to exceed your credit limit.

• Pay off your balance(s) every month. If you can do this, you’ll avoid interest charges entirely.

• Keep track of your interest rate. If you accept a card that has a low introductory interest rate it may go through the roof when that introductory period expires. Check your statements every month to make sure you’re getting exactly what you had agreed to. If you see that your interest rate has taken a huge leap upwards, you might try to pay off your balance as quickly as possible or even do a balance transfer to another 0% interest card.