Monday, March 22, 2010

Credit cards

You've probaby heard that you need credit cards to build credit history. Then you get a credit score, and then you start borrowing sums greater than $20 from your best friend. This wasn't always the case--plastic used to be very expensive to carry. You had to buy a washing machine from Sears and pay it off monthly to generate good faith credit.

But this 2010. Even this Luddite carries plastic in his wallet between gold doubloons. I'd rather build up my credit without having to buy a major appliance every year. But why? What good is good credit?

Credit allows me to borrow money from my bank to buy something I normally can't afford without saving for years, e.g. a used pirate ship. I want to get charged the least interest possible, especially because as a new pirate, I'm learning the ropes and don't want all my hard-earned plunder going to a landlubbing bank.

While banks say they prefer people with good credit, they make less money on honest pirates. The safer the bet, the lower the returns. The entire financial sector demonstrated this sort of roulette thinking with the sub-prime mortgage credit default swaps. They didn't learn their lesson: pirates with good credit still have lower rates of return. They just up the fees on us--because we always pay. Then they spin the wheel, betting on risky lenders.

They'll do all sorts of crazy tricks to get you to part with your loot. Take, for example, all the stupid credit-card checks my bank keeps sending me in the mail. These are terrible. Don't ever use them. They start accruing interest immediately, they have finance charges, and psychologically they look like checks but they're not: they're instant debt!

Rule zero: the bank is not your friend. At its best, your bank is a business partner, but a shady one. He's the guy on the corner selling hot speakers out of the back of his truck. He swears that he acquired them honestly and he's just passing his good fortune onto you. He's lying. Bank will lie to you in the same way, the only difference is since they influence large swathes of government, their lies aren't illegal.

In today's age, it's unfortunate that we have to carry plastic instead of gold-plated latinum, but it's hard to find a Ferengi to trade with. Terrestrial banks need finance charges and ridiculous interest rates on carry-over balances to keep their gluttonous CEOs from jumping off the Empire State Building. But you don't have to contribute to keeping caviar on their plate in order to take out a boat loan. It's even possible for you to legally leech off the system. Here's some tips to keep them from getting yours, and get a tiny crumb of the pie for yourself.

1) Never carry a balance. While paying your minimum will keep your credit report in check, it's handing your money to bank on a silver platter. What did they do to deserve 20%-30% interest? They gave you a piece of plastic. My credit union works harder for car loans in 4% range.

2) As I already said, don't use credit-card checks, or instant cash (if your card has a pin that works at ATMs). Every time you do this, a bank CEO plucks the wings off a fairy.

3) Carry a card that has some sort of rewards program but no fee. Some of my friends like airline miles. I have two cards, one gives me 1% back on all purchases, and the other gives me credit at REI. An aside: My bank has been trying to get me to switch to a "better" card instead of the one with 1% back. It looks like a deal, but the bargains drop off after six months and the rate is less than 1% and it's only valid at certain merchants. When in doubt, rule zero.

4) Don't have more than two cards. More cards work against your credit rating. Two is good in case the magnetic stripe on one doesn't work or there's fraud and you need a working credit card.

5) Never give money to the bank. That's why you don't want a fee, even if the airline miles are so enticing. Fight all finance charges, even if you're in the wrong. Cancel if they disagree. My friend missed his payment by a day. He called them up to have the fee reversed, but they didn't budge, so he canceled the card right then and got a new one from another bank. That's the right thing. A month later, the same thing happened to me with the same card, but the difference was that they reversed the charges immediately. Why? I have other large accounts with that bank, whereas my friend didn't. Sometimes banks play the loyalty card in your favor. Use it.

6) Pay cash at small businesses. That 1% I get back is actually paid for by the merchant. So if I take a little bit out of big-box store's profits and the banks profits, I feel good about it. If I do that to my local Lebanese restaurant, I feel pretty guilty, especially because the banks charge higher rates to smaller stores.

7) Actually look at your credit card statements. I do my banking online, but I take time once a month to make sure everything looks right. I caught a major fraud charge this way two months ago. Don't pay for someone trying to cheat the system. Lehman's and AIG don't appreciate the competition.

If you never carry a balance and never pay finance charges, you're the bank's worst customer. Congratulations! While they still make money off the merchant for the right to take credit card transactions, it's not your dime.

If you can't pay your balance at the end of every billing cycle, you're living beyond your means. Go back to my previous post on budgeting for help figuring out where you're overspending.

There's a few directions we can go from here. What banks are better, or how to spend less, or how to live with less things. But we're going to come back to these important topics later. It's time for a diversion. Next up: The Art of Eating In. UPDATE: Between the two posts is where I suck it up and take my own advice, I called the credit card bank! UPDATE 2: The bank tried to take my money again. Read about it here and here.

2 comments:

  1. these are some good tips! some friends and i have been working with a new way forward recently, and their thing is "break up with your bank". i can't quite go that far yet (been badgering r for years but he's not budging). it's nice to have some other, less nuclear, options.
    http://www.anewwayforward.org/

    ReplyDelete
  2. I am planning to do a post at some point on which banks are better. My research is very preliminary right now, but it goes without saying that CUs are local, and that local is good. (We'll explore this truism in some of my future posts, too)

    ReplyDelete