Credit Cards Overview

While there may be plenty of problems with credit cards they are often very useful and can certainly help you in your financial life.

Credit Card Freebies. One big advantage of using credit cards is that many credit cards today offer free stuff to encourage you to get or use one particular card. The card companies prefer not to compete on interest rates and other card costs. So they have come up with stuff to hand out that is less expensive to them than cutting interest rates and fees would be. Some of that stuff can be very valuable to you if you pay your balance in full every month. If you don't pay your balance every month, the heavy interest you will pay to the card company is almost certain to far outweigh the value of the freebies you get.

The freebies take many forms:

• Cash rebates on purchases-say, 1 percent on annual purchases totaling over a certain amount and a smaller rebate on a smaller annual total. At the end of the year you get a credit or a check for the rebate amount.
• Future purchase discounts (usually only on store cards or store/bank hybrid cards). For example, Bloomingdale's provides bonus points that can add up to gift certificates for each charge. Eddie Bauer sends out certificates good for ten or more dollars off your next purchase when you use its card for a couple of hundred dollars' worth of charges. These programs can save you lots when you make substantial purchases at one retailer.
• Frequent-flier bonus mileage-a 2 percent discount on everything you buy. All the major airlines have credit cards affiliated with their frequent-flier programs. These are bank cards, not cards issued by the airline. The easiest way to join these programs is to pick up an application at the airport or airline city ticket office. Once you get one of these airline-affiliated cards, you will receive a frequent-flier mile for each dollar you charge. Those miles are worth about two cents each. Since you can use your frequent-flier Visa or MasterCard (American Express and Diners have similar programs with the advantage that their miles do not expire in three or so years as do miles on most of the other frequent-flier cards) to buy just about anything today, you can get miles on everything you spend.
• Two-for-one flights around the country. Several of the airline cards offer a two-for-one voucher (which could be worth several hundred dollars to you) if you apply and are accepted for their card as an incentive to apply. The American Airlines program has done this fairly often. Generally, the offer is made to new members of the airline's frequent-flier club (membership is free simply by filling out an application for the club) by mail in the welcome package sent to new members. So on joining an airline's club, you may well get such a two-for-one voucher offer.
• Free merchandise. Many credit cards, especially around the winter holidays, offer merchandise bonuses in special seasonal mailings to cardholders.
• Everything is negotiable. Keep in mind that credit card companies spend lots of money to find new cardholders. If you are a desirable card holder (i.e., one who pays the bills and charges up a storm), they don't want to lose you. Interest rate too high? Call customer service and ask them to cut the rate. Charged a late fee or a fee for a bounced check, perhaps because the mail was slow? Ask that it be waived. You lose nothing by asking. Very often you'll win.

Financial organization

A plus of credit cards (and in some ways the reverse of the privacy problems they bring) is that they can help you organize your business and personal finances. If you charge everything you possibly can, you will have an almost complete record, along with your checking account register, of where your money went. This can be invaluable at tax time.

Stop-payment rights

Perhaps the biggest advantage of using a credit card is your stop-payment rights. Those rights can help keep you from being stung on many sorts of purchases. A good example is when you buy things by mail or phone order. It's very hard to understand why anyone who has a credit card would use anything else for a mail-order purchase because, when you use a credit card, unlike a check, if you don't get what you ordered you can stop payment on the charge and get your money back.

Improved credit rating

Another plus of using credit cards, so long as you make all your payments on time, is that regular use will help your credit rating by showing that you meet your credit commitments in timely fashion. Of course, if you don't meet those credit card commitments in timely fashion, your credit rating is hurt.

Fewer bank trips

Using a credit card can really cut down on those annoying trips to the bank to get cash. It's also great to be able to get a cash advance when the weekend looms and you're not in the vicinity of the bank that has your checking account.

Extended warranty, theft, and damage protection

Many cards provide theft, damage, and added warranty protection on purchases made with the credit card. These programs provide valuable benefits which many of us forget about when they might come in handy. When that home computer breaks down two weeks after the manufacturer's warranty expires, the free warranty on the credit card purchase will probably pay for the repairs if you have the original receipt. These warranty and theft protection programs require that you closely follow their sometimes rather complex rules.

Ability to purchase bargains

If you come across some super bargain in, say, a couch, or a trip to Paris, you can use your card to snap it up without worrying if your check is going to bounce.

Float

Things can cost you less when you pay by credit card. Float is the use of money you already spent before you pay the charge bill. Here you gain by not having to pay for purchases right away. You can put that money to use earning interest for you until it's needed to pay the bill.

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