Help with Credit Cards

This page is to share my experience and lessons learned about credit cards. There are many tricks which can help increase your credit rating and reduce the amount of interest you pay. I've been up to $11,500 in debt on credit cards but still have an excellent credit rating. Even though I make what is considered barely above low income, the balance was paid off in about 2 1/2 years. I did this using the techniques listed below.   Disclaimer

Balance Transfers

This will save more interest than anything else you can do. Typically, credit card companies will give you a reduced rate of about 10-12% less than the average rate for transferring your other card balances to theirs. This special rate is usually only good for 6 months. The longest I've seen is with my Citibank Platinum Visa (Citibank Classic Visa was my first credit card). My last balance transfer was 3.9% until it was paid off. If you have a good credit rating, you can sometimes get as low as 0% on balance transfers to a new card.

If you can't transfer all of your balances to a new card, transfer from whichever has the highest interest rate first.
A month before the special rate ends, transfer back to one of your other cards (e.g. if rate ends in August,transfer at the beginning of July). This gives time for transaction to go thru and keeps the interest low.
If you need to get a new card but get rejected twice or more, wait until one of your other cards is low enough to transfer to. Too many rejections or new accounts can hurt your credit rating making it even harder in the future. If you don't have another card then wait at least 6 months to apply to a different card.
Even if the cards you have aren't advertising a special rate for transfers, you can call them and ask for one.
Don't get a secured card for balance transfers. You're better off using the cash to pay your existing cards.
A balance transfer also simplifies your finances by only having one payment to make.
Note: Proposed regulations may change the ease and requirements for balance transfers.
Mail your payment as soon as you can. Don't wait until the last minute. Not only does waiting increase your chances of being late but it also increases the amount of interest you pay. Your interest is compounded daily based on the average daily balance for the month. The sooner you send your check, the lower the average balance will be for the next month. Having less days in the month with the larger pre-payment balance reduces your average for the month. If you make payments of $800 per month paying on the 5th instead of the 20th of the month will save about $5/month. Below are some examples of how much paying earlier will save over the life of the balance.
Example of excess interest over the life
of an $8000 balance with monthly payments
of $800 and an interest rate of 16%
 Payment received
on 5th day
Payment received
on 20th day
Start Balance$8000$8000
Total Interest$537.82$598.05
Total Paid$8537.82$8598.05
# of Payments1212
Excess Interest0$60.23
Example of excess interest over the life
of an $8000 balance with monthly payments
of $250 and an interest rate of 16%
 Payment received
on 5th day
Payment received
on 20th day
Start Balance$8000$8000
Total Interest$2321.27$2411.37
Total Paid$10321.27$10411.37
# of Payments4343
Excess Interest0$90.10
Notice how much extra you pay when you make smaller payments.


Check Statement
Always compare your charge slips to your credit card statement at the end of the month. After doing so myself, I'm amazed that so many people just throw their slips away. When I used my card on a daily basis, I found at least one mistake every month. Generally, the error was between $1 and $10. As these were usually at whatever restaurant I was frequenting at the time, I normally just talked to the owner to get the cash or a free meal. Getting it fixed thru the store or restaurant is usually much easier and faster than thru the credit card issuer. Restaurants seem to be the biggest culprits. They usually don't have the personnel to audit charges thoroughly and servers are often rushed or distracted by other customers. Below is a list of the most common mistakes I've found.
Tip entered wrong.
Double charged - Usually this happens when the cashier has a problem running the card and swipes the card to try again. The first charge never shows up on the store terminal but there will be two charges on the bank computer. This is usually from connection problems. Occasionally, an inexperience cashier will run a card again when the printer has problems not knowing they can do a reprint without running the card again. Also, both of these can be faked to cover up money stolen from the register.
Extra zeros - Most common with the tip amount as this is always entered in manually. I've had many $1.00 tips entered as $10.00. I also have had this used to cover up stolen money. The same waitress had made that "mistake" three times in one month on my card alone. Apparently, this had happened to quite a few other people so she was quickly caught.
Re-occurring monthly fees - Monthly automatic charges for services such as Internet access and such sometimes will charge an extra month after you have cancelled the service. This one can be hard to fight so it's best to dispute it (by writing a letter to the bank or filling out the form on the back of your statement) and let the bank deal with it. Any amount which is disputed doesn't have to be paid until it is resolved and only if the findings go against you. If you have any statements with billing dates and what month the fee was for, send a copy of this as well.

Credit Repair and Building Credit
Standard Credit Cards
When you first get a card, it will most likely have a very low limit. Use it only for things you NORMALLY buy such as groceries and internet service. Try to come close to maxing it (without going over) then pay it off in full at the end of the month. After about 6 months, apply for a new card. If accepted use both cards at least once a month then pay in full at the end of the month. About once a year, each card should raise your limit. Once the limit starts raising, remember not to spend more than you can pay off at the end of the month. If you do ever carry over a balance always pay more than the minimum payment. Not only does this reduce the interest, but can also increase your credit rating. I try to pay at least double the minimum payment.
Secured credit cards
Otherwise known as "Guaranteed Cards", these are credit cards which are secured by a deposit you make into a secured account (aka collateral). These are designed for people who have made mistakes in the past. This is why they usually have a very high interest rate. They are, however, the easiest way to rebuild your credit. Be very careful when selecting a secured card. The rules for everything from interest rate compounding to annual and application fees vary drastically between cards. Read the fine print.Other than when selecting a card, the process is the same as with a standard card. Purchase only normal, basic items with it and pay it off in full at the end of the month. Stay in good standing and within a couple years (often less), you can get a standard card with much better rates. If you need a higher limit before then, you can often deposit more money into the account to raise your limit. Some cards will raise your limit to 150% of the deposit after 6 to 12 months if you don't have any late payments. After you have good enough credit to get a regular card, you can get your deposit back.

Remember, don't run out and buy a new entertainment center the day you get your card. Only use for normal monthly spending.
The bank won't charge you interest on purchases if they are paid off in full the first month.
Put your paycheck in a savings account then transfer into checking over the phone when you pay your bill. The interest will cover any annual fees you may have to pay plus earn you a little extra money.
If you don't want the extra work, get an interest checking account. The interest is a little less but easier to manage. The opening balance is often higher than a savings account and there is usually a minimum balance. Check the past years worth of statements for your current bank accounts. The minimum balance should be listed on it. If, at any time, your minimum balance has been less than the requirements for the interest checking account, go with a savings account as you get charged a fee every time you drop under the minimum. Again, read the fine print.
After 6 months to a year, try to get a card with better rates or that is unsecured.
Be very wary getting cash advances. Not only do they charge an extra fee, but the interest rate is higher. This is very expensive with secured cards. Also, there isn't a grace period on advances. You will still pay interest even if you pay it off at the first statement.
Credit Card Review
Visa/Mastercard - The most common and most accepted cards. I've never seen a store that accepted one but not the other so they may as well be the same card. Interest, annual fee and benefits will vary from bank to bank. With halfway decent credit or better, you shouldn't have to pay an annual fee.
American Express - The regular American Express is a charge card, not a credit card. I don't recommend it because you can't carry a balance and the annual fee is the highest of all cards. It used to have very good benefits compared credit cards but over the past couple decades the benefits with most cards are the same or better. My Citibank Visa Classic had better benefits than an American Express Gold Card. Both the classic and Blue cards aren't accepted in anywhere near as many places as Visa/Mastercard. This is mainly because American Express charges a much higher fee to the retailer. Outside the US, acceptance is closer to Visa/Mastercard.
American Express Blue is a regular credit card but I don't see any advantages to it over any of the other cards.
Discover - A little harder to get than most credit cards but worth it if you can. They pay cash back on all your purchases. I use it everywhere that accepts it for my normal spending. The interest rate is usually a little higher than most other standard cards so Discover isn't good if you need to carry a balance over a month. In the US, Discover is accepted a little more than American Express. Outside the US, I don't know so better take something else. If you get a Discover card also get a Visa/Mastercard for when it's not accepted.
Secured Visa/Mastercard - These are what most of the "Guaranteed Acceptance" cards you see on TV are. You have to put a deposit into a secured account to get a card with that much limit. A couple companies offer cards with a 150% limit (e.g. deposit $100, get a card with a $150 limit). This type of card is only for rebuilding credit after you've had bad debts. They will charge you up the you know what any way they can so always read ALL the FINE PRINT. All secured cards have a high interest rate plus often have large annual and application fees. Fortunately, as long as you don't get any marks against you (see Pay ASAP, you can usually get an unsecured card in 1 to 2 years. Many cards will also increase the percentage limit if you stay in good standing.

© 2008 Chris Mallabon