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Choosing And Using Credit Cards |
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Credit cards are convenient, but they’re also dangerous. A lot of people ruin their financial lives by turning the phrase “charge it” into a reflex. It’s a real problem, but this article explains how to make good use of credit cards and how to choose a good credit card. This information, by the way, applies both to using a credit card for personal expenses and to using a credit card for business expenses.
Selecting the Right Credit Card
Selecting a credit card is easy. If you don’t carry charges forward from month to month, choose the card with the lowest annual fee. It doesn’t matter to you if the credit card company charges a painfully high interest rate, since you pay only the annual fee if you pay your monthly credit card bill on time.
If you do carry a balance, it makes sense to choose the card with the lowest interest rate. Some credit card issuers play interest rate calculation tricks that make it very difficult to make apples-to-apples comparisons of credit cards. But if you choose the credit card rate with the lowest annual percentage rate, you’re doing about as well as you can.
The Right Way to Use a Credit Card
You shouldn’t use a credit card as a way to borrow money. That means always repaying the charges within the grace period. You want to be what the bank calls “a revolver,” which is a person who always pays his or her credit card bills on time.
After investments in a profitable business, a 401(k), and a deductible IRA, the next best investment you can make is to pay off credit cards that charge a high interest rate. Earning a tax-free interest rate of, say, 14 percent, which more than what a 401(k) and deductible IRA pay (and probably only slightly less |
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than investments in your business should pay) is too good to pass up.
NOTE: While credit card interest on personal charges would not be deductible for income tax purposes, credit card interest on business charges should be deductible as business interest expense. Therefore, the worst kind of credit card debt is personal credit card debt. Business debt isn’t quite as bad.
Do Affinity Cards Make Sense?
An affinity card is a credit card that’s issued by someone other than a bank—such as a car manufacturer, an airline, a professional group, and so forth. Affinity cards typically combine the usual features of a credit card with some extra benefit connected to the issuer. In the case of a General Motors card, for example, you accumulate dollars in a rebate account by virtue of what you spend with the affinity card.
In general, an affinity card—especially one that doesn’t charge a fee—is a good deal as long as the interest rate is competitive. For example, I have a General Motors credit card that includes a 5 percent rebate account. In other words, five cents of every dollar I charge on the card goes into a rebate account that I can use toward purchasing a new General Motors car. How big your rebate gets depends on the type of affinity card you have. For example, as of this writing the regular General Motors credit card lets you accumulate up to $500 a year to a maximum of $3,500. The General Motors gold credit card lets you accumulate up to $1,000 a year to a maximum of $7,000.
There are many different affinity cards. Ford has one. Most of the major airlines have them too. Airline affinity cards let you accumulate frequent flier miles based on the credit card charges. In the plans I’ve seen, |
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