7 Reasons Every College Student Should Carry a Credit Card
With the start of the school year just around the corner, this is a good time for college students (and their parents) to make sure their financial life is in order. A student credit card can be an important financial tool as college students head back to school. Of course, like all credit, student credit cards should be used responsibly. But with proper use, a credit card has many benefits for university life. Here are 10 of the top reasons every college student should carry a card. Read more…
10 Ways Credit Cards Can Promote Frugality
Credit cards get a bad rap when it comes to frugality. Stories of people maxing out their credit cards and then paying more in total interest than they borrowed in the first place help to promote this notion. And the credit card industry doesn’t help itself much, particularly when it jacks the interest rate up on cardholders when they miss a payment. But the truth is that credit cards can promote frugality and improve finances IF they are used responsibly. So here are ten ways credit cards can actually promote frugality and improve one’s finances.
How credit cards can promote frugality
- Tracking Expenses: Credit cards are a great way to keep an eye on expenses. I put almost everything we buy on either a credit card or a debt card. Typically we choose credit cards because of the rewards (see below), but a debit card works just as well. At the end of the week or month, it’s easy to see where all the money has gone.
- Reducing interest: Balance transfer credit cards are a great way to to eliminate interest expenses. We have a balance on our home equity line of credit from a kitchen remodel, and I transfer large balances over to 0% credit cards to reduce the interest we pay.
- Earning interest: You can also use 0% cards to transfer balances into a savings account to earn interest. At one time we had access to $50,000 in 0% balance transfer funds for 12 months. At 4% interest, we could have earned $2,000, although we used it to pay off the home equity instead. But if you have no debt, these 0% introductory rates can be used to simply put some extra cash in your pocket.
- Saving on gas: With the price of gas skyrocketing, it helps to do everything possible to save on cost of fuel. There are several gas credit cards that offer cash rebates on gas purchases as high as 5% or more.
- Saving on Vacation: There are many credit cards that offer valuable hotel, airline and care rental rewards. My personal favorite is the Starwood Preferred Guest card by American Express. The card offers Starpoints toward stays at Starwood hotels, and the points can be converted to miles as well. With your first purchase, you earn 10,000 Starpoints, enough for 3 free nights at a category 1 or 2 Starwood hotel.
- Building credit: Responsible use of credit cards can help build a credit history that can save you a bundle when you go to buy a house. The interest rate a bank will charge an individual depends in large part on their credit score. The higher the score, the lower the rate. Using a credit card that yo pay in full each month (or at least on time) will improve your credit score over time. Also, having available, unused credit will also improve your credit score.
- Saving on taxes: This tip is particularly important if you run a small or home based business, but it applies to everybody. Making purchases that are tax deductible using a credit card gives you an audit trail of the purchase and reduces the risk that you’ll forget about the deduction at tax time. Every year when I sit down to due my taxes, I take out my yearly American Express statement to confirm that I’ve included all the charitable and other deductions we are entitled to.
- Saving for college: If you have a 529 plan with Fidelity, they offer an American Express card that contributes up to 1.5% of your purchases into the 529 plan.
- Saving for college II: With Upromise, a percentage of purchases you make can be contributed to a 529 plan. It works similar to the Fidelity American Express, except that the 529 plan does not have to be with Fidelity, and you can use just about any credit card or debit card. And signing up is free.
- Shopping at Costco: Costco is one of my favorite places to shop. Now with the TrueEarnings® Card from Costco and American Express, you can earn 1% on general purchases, 2% for travel-related purchases, and 3% for restaurant and gasoline purchases. The TrueEarnings card is available as both a personal credit card or a business card.
Using Credit Cards to Start a Business–Risks and Rewards
Using credit cards to start a business is nothing new. In fact, I’ve got a friend who is using a 0% balance transfer business card to fund a product based business he’s just started. When all is said and done, he’ll be in credit card debt of more than $30,000. Now in his case, he has the means to pay off the credit card even if the business fails. But as reported this week in the Washington Post, some small businesses are starting to drown in credit card debt.
So in this article we’ll look first at why people are turning to credit cards to finance their businesses. As it turns out, credit cards do offer a number of benefits to small business. Then we’ll look at how to reduce some of the risks of credit card financing.
The Rewards of Credit Cards for Small Businesses
There are four basic reasons many entrepreneurs turn to credit cards to finance a small start-up.
First, accessing cash through credit cards is easy and convenient. You can now apply for credit cards online in a matter of minutes. And if you have solid credit history, you can easily qualify for tens of thousands of dollars in credit.
Second, many business credit cards come with 0% introductory rate offers on both purchases and balance transfers. These offers enable new companies to finance start up costs without paying interest. With some cards, you can get a 0% interest rate for up to 15 months.
Third, business cards come with many rewards and cash back offers. It’s not at all uncommon to find cards with cash back offers on gas, office supplies, and computer purchases. These cash back offers can go a long way for a new company.
Finally, other means for raising capital have become harder to access. With the credit crunch we’ve experienced over the last year, it has become harder and more time consuming to obtain home equity lines of credit or small business loans. As a result, more and more business owners are turning to credit cards to get them through a cash flow crisis.
Avoiding the Pitfalls of Credit Card Financing
The ease of obtaining cash via credit cards also presents the biggest risk. More and more business owners are getting in over their heads as their credit card debt increases. So what are some of the ways you can reduce the risk that this will happen to you? Here are a few suggestions:
First, don’t spend more money just because you are putting it on a credit card. Study after study shows that we tend to spend more money when we use credit cards than when we pay with cash. If you’re using credit, ask yourself if you’d still make the purchase if you were paying with cash.
Second, make business decisions independent of your source of financing. Some folks tend to take bigger, unjustified risks if they aren’t using their own money. While the credit card company may be funding your business at the start, you’ll eventually be paying the tab one way or another.
Third, budget, budget, budget. Budgets are important for personal finance, but they are absolutely critical for a business. Set out your budget before you starting spending money and raking up credit card debt.
Finally, don’t get carried away with credit card rewards. Sure the cash back offers and discounts are nice, but they should never be the motivation behind the purchase.
Business and other credit card offers can be a great way to finance a new company, so long as care is taken not to over extend yourself.
Credit Card Offers–How to tell the good from the bad
It seems not a day goes by that a credit card offer doesn’t shows up in my mail box or in my email. I get 0% balance transfer credit card offers, gas reward card offers, travel reward offers, and hundreds more. Have you ever closely examined the fine print of these credit card deals? I have. And I’ve found some interesting terms and conditions that every consumer should be aware of before applying for a credit card. So the next time you get a credit card offer, make sure you understand the following terms.
Credit Card Fees
Credit cards come with a variety of potential fees. These fees include an annual fee to have the credit card, fees for late payments, and fees for exceeding the credit limit of your card. You should make sure you understand how much these fees are, and more importantly, how to avoid them. Many credit cards today do not charge an annual fee, so there’s really no reason to pay a fee unless the card offers some excellent rewards or other benefits.
Another type of fee is the balance transfer fee. If you are applying for a 0% balance transfer card, it is critical that you first understand how much the credit card company will charge you for the balance transfer. Many cards come with a no fee balance transfer if you transfer balances when you apply for the card. Other cards charge a fee of about 3% of the balance transfer amount. But here’s the catch. While some credit cards caps the amount of the balance transfer fee (usually to about $75), many do not. Think about it. With a 3% balance transfer fee for an introductory zero percent interest rate that lasts 6 months, you are effectively paying an annual percentage rate of 6%! In short, balance transfer offers with an unlimited balance transfer fee are seldom a good deal.
Introductory interest rates
It’s always important to know the interest the card company will charge. The interest rate is set in part on your credit score. This means that no everybody with the same card will be charged the same rate. That’s another reason to keep your credit score in good shape. But you must pay particular attention to any introductory rates.
Introductory interest rates are typically low interest rates on purchases or balance transfers that last for a relatively short period of time. These introductory rates can last just a few months, while I have seen some that last as long as 15 months. But the point is that they don’t last forever. And it’s important to make sure you understand two things.
First, you need to know when the introductory rate will expire. This helps you plan what you’ll do when the interest rate increases on you. For 0% balance transfer rates, for example, I’ll make sure I have enough available credit on my home equity line of credit before accepting the credit card offer. Second, it’s critical to know what the interest rate will be AFTER the introductory rate expires. I have some cards that go up to a somewhat reasonable 7.99%. But other cards can wallop you with double digit interest rates.
Understand the Rewards Programs Offered by the Credit Card
Almost all credit card offers today come with some type of rewards program. Whether you’ re looking for points to redeem for travel, cash back rewards, 0% offers, or some other program, it’s important to understand the terms and conditions of the rewards offer. Many programs offer introductory specials that last for a limited time, for example. Some gas reward programs offer as much as 10% cash back on gas purchases, but only for a limited time. Whatever the terms are, it’s critical to simply take a few minutes to read through the program so you understand the benefits the credit card offers.