Credit cards have a bit of an identity crisis in our society.  In some circles they are vilified, along with the companies that offer them.  Others see them as a useful tool for financing short-term loans to fund projects or small emergencies.  I personally fall somewhere in the middle, recognizing that there are both pros and cons to using credit cards.

Credit Card Can Be Useful Tools

Grace periods allow consumers to float money.  As long as you submit payment in full well in advance of the due date it is possible to borrow money without interest on credit cards for a short time. However, this can be a dangerous game.  One missed payment can raise your interest rate, cause late fees to be assessed, and cause irreparable harm to your credit file for the next several years.

Credit cards offer reward and rebate programs. I doubt anyone has ever become rich off credit card awards, but if you run purchases you would make otherwise through a card with cash back bonus awards it can really add up!  I used to work with someone who ran all utilities, gasoline purchases and recurring subscriptions through their Discover Card and earned a couple hundred dollars a year in cash back awards.  That’s a pretty nice Christmas bonus.

Credit cards offer added security over carrying cash.  We have been diligently saving for Christmas shopping all year long, and managed to accumulate enough to enjoy the holiday season (and give a little away as well).  Rather than cashing out our Christmas fund and carrying several hundred dollars in cash around the stores, we simply charged it and will pay off the bill from our savings account when it arrives next month.

Potential Dangers of Credit Cards

People are often introduced to credit cards at a young age. Unfortunately, credit card companies have made a habit of marketing to younger and younger ages over time.  The problem with young people owning a credit card is that they rarely have enough income to cover the available credit, and if they run up the card they get sucked into the minimum payment trap for life.

When using credit cards, there is no emotional separation from money. Do you remember the last time you paid for something with a $100 bill?  I do.  It was painful.  As Uncle Benjamin left my hand I could feel a twinge of pain that I wouldn’t have felt swiping plastic.  It is this emotional pain that keeps us grounded, fiscally.

Banks offer overly generous credit lines.  Ever noticed how credit card companies increase your credit line if you approach being maxed out.  And if you pay off your card, what do they do?  Increase your credit line.  It isn’t uncommon for twenty year-olds to have $10,000 credit limits on $20,000 annual incomes.  That just doesn’t pass the common sense test.

Credit cards increase the chance of identity theft.  Credit card numbers floating around are tied to your social security number and credit profile in a database maintained at every institution you do business with, and at all the large credit reporting agencies.  Scary, isn’t it?  Protect your credit card number and the physical card itself by being vigilant with receipts, statements and online purchases.  Review statements for any unusual activity, and keep your bank’s contact information handy in case you lose your card.

If you are like me, and went a little overboard with credit cards at an early age, you might want to consider a low-interest consolidation loan to group your debt at a lower rate.  If you go this route, cancel all but one credit card, and consider lowering the credit line down to a manageable level.  If you don’t, you could wind up with a consolidation loan and more credit card debt.

I have been a member of the Dave Ramsey Total Money Makeover forums for over two years now, and in that time I’ve made several virtual friends, and read many inspiring stories of families who clawed their way out of debt.  I recently read a comment from a new member working their way through baby step two–the dreaded debt snowball. One of the things the new member was struggling with was resisting the temptation to make more than the minimum payment on all her debt accounts.

Generally Speaking, More is Better

When it comes to credit card minimum payments, most financial experts agree more is better.  In fact, some go as far as suggesting that cardholders try to make double the minimum payment to lessen the time they are in debt, and reduce the amount of interest they are charged.  Financially, this makes perfect sense. However, by spreading out your available dollars across several cards you are effectively only reducing each card’s balance a small amount.

Pay More Only On One Card

The main idea behind the debt snowball is paying only the minimum payments on ALL of your debts, and throwing any additional money at the smallest debt.  For example, if you owed $5,000 across five credit cards, your total minimum payments might be around $100 per month ($20 per card).  Now let’s assume you are living frugal, and/or earning extra money, and can apply $500 towards debt repayment.  If you split that amount equally across all five accounts you would only reduce each card’s balance by $100 per month (minus accrued interest).

Under the debt snowball plan minimum payments would be made on all but the card with the lowest balance ($80), and the remaining $420 would be paid towards that smallest card.  Depending on the size of the starting balance, $420 can bring a credit card balance to zero fairly quickly.  When that card is paid off you will only be making three $20 minimum payments and the remaining $440 snowball payment will be applied to the next smallest card, and so on.

The idea of paying more than the minimum payment has been reinforced since the early days of revolving charge accounts, and it is an effective way to pay off debt faster.  However, if you have several debt accounts it might make sense to focus your efforts on paying one debt at a time, while maintaining a current status on other accounts by only making the minimum payments.

If you can only make the bare minimum payments on your credit cards that can be incredibly expensive over time. But using a weak credit card can be even more costly. Research and compare some 0% APR credit cards that will go a long way in helping you to save on those outrageously expensive finance charges. Also, if you like to travel but are having a hard time saving money on your vacations, you should consider some of the better frequent flyer credit cards that you can easily find online.

I recently did something I haven’t done in years–I applied for a credit card.  Now that I am wise to the potential pitfalls of credit card use, I decided it was time to try to recoup some of that money I’ve been pouring down the gas tank.  Gas credit cards that offer rebates for gasoline purchases seemed like the best idea, and I was off to compare various options based on the following three requirements:

• The new card must have a low interest rate.  I am dedicating this card to gasoline purchases and utility payments only, so there is little chance I will roll over a balance from month to month.  However, I’ll try to get a competitive rate just in case.  Find low interest credit cards at CardOffers.com

• I refuse to pay annual fees.  Not much room to negotiate here.  There are simply too many options available to spend $35 plus on a fee just for the privilege of carrying a card in my wallet.

• Extra cashback earnings on gasoline, and other regular purchases.  One of the downsides to using a credit card is that studies have shown we typically spend more money with plastic.  Since I am limiting myself to required purchases only (gasoline, utility payments, etc.), and those don’t have much variability, I feel confident I won’t be spending any additional money running those charges through the credit card and paying them off each month.  In the process, it would be nice to earn a little extra money back for those types of purchases.

And the Winner Is…

The Blue Cash® from American Express®.  This card had everything I needed in a rebate credit card, and offered a nice 5% bonus on cash back at the places you frequent most, like supermarkets, drugstores and gas stations..  What will we do with the cash back money? We will probably drop it in one of our targeted savings accounts like the vacation fund, or maybe even the Christmas fund.  I’ll report back after a month or two to let you know just how much cash rebate we rack up.

To aid in your search, check out the gas credit cards at CardOffers.com

The following is a guest post from Miranda Marquit.  Miranda edits information on debt consolidation for DestroyDebt.com.

One of the most insidious practices of credit card companies is the tendency they have to do their best to get you back into debt once you’ve managed to get rid of it. After all, if you aren’t in debt, you aren’t paying interest. However, as you probably know, it is not a good idea to rack up more debt just as you pay it off. Here are some of the temptations you will face once you start paying off your credit card debt in earnest:

Increased credit line

When my husband and I were paying down our debt, using aggressive debt reduction (or the debt snowball as it is sometimes called), we noticed something very interesting: After making two or three months’ worth of dramatic payments, the credit card company sent a letter raising our credit limit. This happened on each credit card we paid down. Credit card companies don’t actually want you to pay off your cards; they want you to carry a balance. They raise your limit in the hopes that you will spend more. And while having a higher limit can help your credit score, since it looks as though you have a lot of room between your balance and your limit, don’t take the bait. Just because you can put more on your credit card doesn’t mean that you should.

New credit card offers

Another thing we noticed was how the number of new credit card offers started pouring in as we paid off our other credit cards. In the first few months after paying off one credit card, we saw solicitation for new cards increase half again. When we further reduced our debt, the offers came with greater frequency. Some of these cards were, actually, better deals. We received an offer for a great rewards card — with better, fixed interest rate — and decided to take it. We did some balance transferring to help us pay off another card, and decided to use it for its rewards (paying off what we put on it each month). The key, though, was that we canceled our other card. If you do find a credit card that is better than what you currently have, you must balance it by canceling another card. In our case, we picked two cards we wanted, and canceled everything else. And we pay off our balances each month.

Purchase checks

These seem like a good idea, since you can use them to get cash or pay bills, without having to pay the cash advance fee. However, purchase checks can quickly get out of hand, and it is important to realize that it is still you using a loan — they do not represent income. And your regular limits apply. Purchase checks can be one way that you find yourself over the limit, since it is easy to forget to factor them in to your charges. Additionally, some card companies will charge you a balance transfer fee when you use purchase checks.

Other financing offers

The latest offers we have been getting from credit card issuers has been in terms of refinancing. All of the banks that issue our credit cards have offered to refinance our home. Of course, the rate is variable.  Additionally, using your home equity to take unsecured debt and secure it with your home is not usually the best idea. Card issuers will start trying to get your money from interest payments in other ways: personal loans, home improvement loans and other loans are all being offered by card issuers. Once you show you are serious about making payments, they are eager to find other ways to keep the money coming in.

Paying off your debt can be a great feeling. But you have to be careful. Unless you have truly changed your mind-set and your money habits, the temptation to take advantage of these ways of getting you back into debt can be overwhelming. The best practice is to pay off your debt, and then do what you can to avoid getting back into debt.

If you are like me, and went a little overboard with credit cards at an early age, you might want to consider a low-interest consolidation loan to group your debt at a lower rate.  If you go this route, cancel all but one credit card, and consider lowering the credit line down to a manageable level.  If you don’t, you could wind up with a consolidation loan and more credit card debt.

I caught a great post at Moolanomy last week that described the five stages of financial health.   The first stage, which Pinyo labeled “The Debt Spiral,” is an especially tough one to move beyond.  Over the last few months of writing about personal finances I’ve received several emails from readers with variations of the same problem–credit card debt is suffocating them.  Often they can’t pay credit cards, their mortgage, or their car note.  Most of the messages go something like this:

We are making minimum payments, but don’t have enough cash to live off and to ‘float’ until the end of the month we have to use credit cards again.  When I get my next statement the balance, including a few new charges and interest, is right back up to where it was last month, or higher!

I’ve been on this hamster wheel myself and it is not a fun place to be.

So how does one begin to gain traction and actually reduce credit card debt without adding more to it?

Stop spending with credit cards.   Take a hard look at the expenses you’ve charged recently.  What things could you have lived without?  If these expenses were necessary items (food, gas, power bill, etc.), what other items could be cut from your monthly budget to make room for these expenses?  You are in a hole, and at some point the only way to move towards climbing out is to stop digging.  For the remainder of this plan to be successful you must adhere to this first step and vow to never swipe the card again.

Make two payments per month.  Credit card interest is charged on what’s known as the “average daily balance.”  If you add up your ending balance every day of the month and averaged it, that is the figure that is used to calculate how much interest you pay your card issuer.  One way to drive this figure lower is by making two half-payments each month, at roughly the half-way point in your billing cycle.

Ask for a lower rate.  If you are unable to get a low-interest consolidation loan to pay off credit cards, you may have luck getting your current card’s rate cut.  Many personal finance books advise you to call up your card issuer and simply ask for a lower rate, which they report happens with predictable success.  I haven’t personally had that experience with credit card issuers.  And as a former employee of a credit card issuer I can tell you that approving rate reductions is not the norm.  However, there are a few things for you to consider before calling up your card issuer, in much the same way you would gather some numbers before asking your boss for a raise.

• Are you a good customer? I don’t mean you pay your bills on time, or pay off your balance as soon as the statement arrives, I mean are you a good customer from the bank or card issuer’s perspective.
• Are you a profitable customer? Take a look at your last six months worth of statements.  How much interest have you paid?  If you frequently roll over a balance each month, carry a relatively high balance, and don’t have a record of late payments, you will likely have success negotiating a lower rate.  However, if you are habitually late, or do not carry a balance over from month to month it may be more difficult to convince the issuer that you are a profitable customer.

Double up.  If you are stuck with a particularly high rate, and the issuer refuses to lower it, try to double the amount you are required to pay.  Credit card companies aren’t dumb.  They know that by requiring you to pay only 2% of the balance you will be mostly treading water after the majority of that minimum payment is allocated to interest charges.  Pay more than the minimum as often as you can.

Get that fee waived.  Most issuers will remove a fee one or two times per year for good customers.  If you were nailed with a late fee last month, but have since made amends, you may have luck calling the card issuer and asking to have the fee reversed.  This will help bring your balance back down, but won’t lower the current month’s payment due.

Increase your income.   There are only so many tricks one can try to reduce their monthly credit card balances.  In the end, it is all about decreasing your expenses and increasing your income to free up more cash to be applied to debt.  If you can’t pay your credit cards in full, consider taking on a part time job, or asking for overtime at your full time job.  It isn’t fun being away from family to work extended hours, but it is only temporary.  Use every single penny that is earned from this additional work to pay down credit cards.

Available credit is not an invitation to charge.  After you’ve made some progress at eliminating debt card issuers will be on to your plan and start sending out teasers for balance transfers or convenience checks citing your available credit as a potential source of funds to remodel your home or take a cruise.  I know it seems tempting, but remember that promise you made in the first step and hold steady.  To run balances back up would undo all of your hard work put in up to this point.

Making only the minimum payments on your credit cards can be very costly over time. But having a less-than-ideal credit card can be expensive as well. Take the time to investigate some of the introductory 0% interest credit cards to help save money on finance charges. If you like to travel but want to save money, even look to some of the better airlines rewards cards that are still available.

One of the more aggravating scenarios as a credit card holder is when an unauthorized, or incorrect charge finds its way on your billing statement. It can happen for a host of reasons, such as fraud, incorrect merchant batch processing, or simply an honest mistake keyed in by an employee. Regardless, the process of disputing a credit card purchase can seem futile with the number of rules, regulations and deadlines that must be followed. I worked in a fraud and disputes area for a major credit card processor for a couple years. During my time there I saw many legitimate claims rejected because cardholders did not follow instructions for disputing a charge. Below is a guide that should help guide credit card users through the maze of dispute procedures to ensure their cardholder rights are protected.

Contact the Merchant Immediately

If you find that a merchant has erroneously overcharged your account, or charged your account in error, contact them immediately and ask for credit. If the merchant refuses to take care of the situation, explain that you are preparing to dispute the charge with your card issuer. Merchant banks don’t like receiving tons of disputes against a merchant, so many times merchants are willing to cooperate to stay off their bank’s bad list. Don’t give them too much time, however, as the clock is ticking on your own deadline to submit a written dispute.

Get in Writing

Some issuers now allow disputes by telephone or website contact, but I would still advise cardholders to submit a written letter of dispute. This written letter protects your cardholder rights against an issuer claiming to have never received your phone call. It is worth the additional cost to send the letter certified mail, return receipt requested, so you have proof of submission and receipt.

Include Your Story

For straightforward disputes such as “Don’t recognize the charge,” or “Unauthorized purchase” it may be enough to simply complete the dispute form on the back of your billing statement, or via your online account. However, for more complex situations involving travel or entertainment, or quality of goods or services received, it is best to include a brief letter providing background. Be sure to include a timeline (to the best you can remember), and any names of agents from companies referenced in your letter. This letter will be attached to the dispute paperwork forwarded to the merchant’s bank, and is a requirement for these types of disputed charges.

Know Your Rights

Disputed credit card purchases are covered under Regulation Z of the Fair Credit Billing Act. Interest may not accrue on disputed charges, and you cannot be reported delinquent for refusing to pay a charge that has been properly disputed with the card issuer in writing. However, this does not mean you do not have to pay minimum payments for the remaining portion of your balance.

Things Move Slowly

Here are the most important deadlines to remember when submitting a dispute:

• Cardholders have 60 days from the date of the statement in which the original transaction appears to submit in writing a formal letter of dispute
• Issuers (banks, credit card companies, etc.) have 30 days from the day they receive your letter of dispute to place the item in dispute, charge the item back to the merchant and provide a temporary credit to your account (this is called a “chargeback”), or provide you with information proving it is your charge.
• The merchant’s bank, upon receiving a chargeback, has 45 days to represent the item to the issuing bank with further proof that the charge is correct. At this point the cardholder’s bank can either issue a 2nd chargeback providing more details, or place the charge back on the customer’s account.
• If the merchant’s bank is still in disagreement after receiving a second chargeback a case for arbitration is filed and both parties make their case to a 3rd party for resolution.
• If your bank is unwilling to process a 2nd chargeback and places the representment back on your account you may have to pursue legal action against the merchant in a small claims setting. Depending on the amount of the charge this may or may not be worth the time and money required.

There is a predator on the loose at college campuses around the country. While many parents and administrator struggle to tackle issues such as fraternity hazing and binge drinking a silent killer is stalking college students. They are frequently spotted hanging out around student unions, football games and other large student gatherings. There weapon of choice? Credit cards.

photo by p200eric

Sign Your Financial Life Away for a Free T-Shirt

I remember attending football games as a student at a large state university and noticing the line for souvenir cups and popcorn was nothing compared to the one for the MBNA table. After all, they were giving away free t-shirts, as if us college students didn’t have enough of them. Later, credit card companies made an even more attractive pitch to the broke college student by offering free pizzas in exchange for a completed application. I am ashamed to admit that I signed up for a Discover Card from one of these bozos and used it to rack up a few hundred dollars in textbooks, groceries and other college-life expenses.

Brand Loyalties Run Deep

After I left school I went to work for a 3rd-party credit card processor and I began to see the “behind the scenes” view of the way certain demographics were targeted for credit card marketing campaigns. It was eye opening. I was upset that I had fallen for the hype, but at the time it was hard not to. Free t-shirts, pizzas, and promises of cash back and rewards for groceries was music to a college student’s ears. They made it sound as if you were really missing out if you passed up that table of applications. In hindsight I should have not only passed it, I should have run from it like the plague!

I eventually cut up that first credit card, but found it to be much more difficult than cutting up ones I have received since. Credit card companies are smart; they knew I would be loyal to that first card because I received it at my alma matter, and I used to purchase things for my little college apartment, and my girlfriend (now my wife).

Kickbacks During Kickoffs

Do colleges let credit card companies set up shop out of the goodness of their hearts? Of course not. There are financial incentives for colleges to promote credit cards. Co-branded cards often feature a picture of the school, or their logo, and those licensed images are bought by the credit card companies for use on the plastic. Many cards now offer to make donations to the school’s scholarship fund if you carry their card in your wallet. How nice. As if the next time someone is purchasing a 52″ plasma television they will think to themselves, “This sure is expensive, but at least I am sending three dollars to ACME University!” If you really want to be a good alumni and support your alma matter, write them a check and skip the co-branded credit card. It will probably cost you less in the long run.

If you are a college student, or the parent of a college student, I strongly encourage you to avoid the temptation to sign up for cards marketed on campus. Parents should also voice their displeasure to college administrators when credit card marketers set up shop on campus. I’m not anti-credit cards. In fact, I think they are a useful financial tool when used wisely. However, it does not make sense to allow credit card companies to peddle their product on campuses with 18-22 year-old young people, who for the most part do not have an income, nor a credit history.

As an additional resource for college students, I highly recommend reading a post over at The Wisdom Journal, 12 Things I Learned by 42 that I Wish I Knew at 22. I wish I had read this one when I was 22.