March 06, 2005|By Carolyn Bigda
Credit cards have earned a bad reputation for driving Americans into debt made worse by high interest rates and late fees.
But credit cards can be a powerful ally if you know how to use them right.
If you pay the balance in full each month, you essentially are shopping with a short-term, interest-free loan.
"Living within your means has great payoffs," says Mary Ann Campbell, who teaches personal finance at the University of Central Arkansas. "It's a wonderful advantage to have cards that are unencumbered, to have the credit ready in an emergency."
And should an emergency arise, the credit is available for you to use.
Charging purchases is a form of insurance, too. A credit card issuer will help you dispute charges if you run into problems with a disreputable merchant. Many cards insure against theft or damage to items within 90 days of purchase.
Also, in some cases, a credit card will extend the manufacturer's warranty.
Then there's protection against identity theft. Under federal law, you are responsible only for the first $50 of unauthorized charges. Visa and MasterCard relieve you of paying even that much under their cards' zero-liability policy. With debit cards, such benefits are more limited.
Beyond a credit card's security, there are about 20,000 rewards cards that let you earn such things as gift certificates at your favorite restaurant to contributions in a Fidelity investment account.
Essentially, the more you spend, the more rewards you receive, meaning that only those with proven spending discipline should hold one of these cards.
You don't want to carry a balance on rewards cards because their interest rates tend to be 1 percentage point higher than those on regular cards, said Curtis Arnold, founder of CardRatings.com, a free resource that rates credit card offers.
"College freshmen and sophomores shouldn't consider these cards," Arnold said. "You have to prove to yourself that you can pay off the balance in full."
Just to qualify for a card, you need an excellent credit score, generally 700 or better out of a possible 850. Anything lower and you risk a higher interest rate or being denied a card.
Those who pay bills on time and build up strong credit scores should consider their lifestyle in picking a card.
For instance, if you want help with paying down a mortgage, the Citi Home Rebate Platinum Select card applies 1 percent of every dollar charged toward the mortgage principal.
Don't assume that you have to pay an annual fee, which is still common with airline rewards cards.
Be wary of offers that require you to carry a balance or that base their rewards on entries in "jackpots." In other words, carefully review the card's terms and conditions, making sure there is a reasonable benefit without having to stretch your budget.
Even the popular cash-back cards might not be straightforward. Some base the rebate amount on the level of spending or on specific vendors, such as grocery stores and gas stations.
Using a credit card for sundry expenses can have benefits beyond fattening your reward. "It's convenient, and then there's a record of your spending," said Linda Sherry, of Consumer Action, a nonprofit consumer advocacy group.
"But keep it in check," she said. "If you're using the credit card on a daily basis, sometimes the balance can be higher than expected at the end of the month."
And for times when you do need to carry a balance temporarily, use a credit card with a low interest rate, whether that's a rewards card or not. High interest payments will quickly wipe out the value of the reward.
E-mail Carolyn Bigda at yourmoney@tribune.com.
