Here’s the #1 Thing Millennials Don’t Understand about Credit Cards
The economy relies on consumer credit to keep the it ticking along. And banks have a seemingly endless supply of currency to lend out to those who are both accepting to it and credit worthy. One of the favorite tools banks have to lend out money, quickly, are credit cards.
When used correctly, credit cards are a fantastic product that offer the borrower perks, points, cash back, and most importantly, a free loan- albeit for a short period of time. And when the statement is generated at the end of period, the borrower generally has 1-4 weeks to pay “the amount due”, which is the absolute minimum. And the banks hope you ONLY pay this minimum.
In my view, the #1 thing Millennials don’t understand about credit is how to take advantage of the features and terms of their credit cards offered by their financial institutions. Features and Terms are such things as interest rate charged (I.e. for cash advances and purchases), repayment schedules, perks, points, cash back and so on. While Millennials tend to focus on the “What’s in it for them”, i.e. How many airline points they will receive, they tend to overlook the pieces that cost them money.
Here are some Terms & Features to look out for:
Your interest rate – This could quite simply the single most important factor if you carry a balance. While in general it doesn’t make much financial sense to carry a balance, from time to time, this is just not a possibility. If carrying a balance is a much, look to a low rate card. These are ideal for those who absolutely need to keep a balance. But buyer beware! Many low rate cards sit around 15-18% APR. In my opinion, this is not low interest. Find one that offers an ongoing interest rate of around half that. Some banks offer these products as “Personal Lines of Credit with Visa/Mastercard access”. If that is not possible, consider performing a balance transfer hack.
Balance Transfer Cards – These are rather easy to obtain as banks often fight for new credit card customers. As of this writing, I was able to find 3 credit cards that offer Zero percent APR for 18 months on balance transfers. These can be a valuable tools to pay off existing high interest credit card debt. How it works? Apply for a new card, perform the balance transfer (Effectively paying off your higher interest debt), and then pay it down as aggressively as possible during the introductory period. If you can’t pay it fully off before the introductory period is over, consider applying for a different card with similar balance transfer features, and repeat the balance transfer once again. Rinse and repeat until you’ve completely cleaned up the debt. There is one “Caveat” that needs to be known: The balance transfer fee. This is a one time fee ranging from 0-5% – and is an up front charge on the entire balance transferred. For instance, if the balance being transferred is $5,800 and the balance transfer fee is 3%, then the transfer fee is $174 – of course, it’s far less than what you might pay with a traditional credit card.
Travel “Points” Cards – Many companies offer “points” card that are tied to airlines, or, can be transferred to airlines. Seek out cards that offer the most flexibility. For example, can the points card tied to my favorite airline, or can I use those points on another airline? And are those points easily useable? Some airlines are easier to book award travel than others. It’s important to do your research in advance.
Cash Back – These cards are ideal for those who don’t travel much, and keep a minimal balance. Typical cash back cards offer between 0.5-4% cash back on purchases. Keep in mind, some credit cards only offer the attractive rate on certain categories, such as groceries. If you can exploit these categories, by all means go ahead.
No Foreign Transaction Fee Cards- For those who frequently purchase in currencies other than USD, this can be very helpful. Foreign transaction fees can run upwards of 2.5%.
Annual Fee – This is a necessary evil. The best credit cards will often come with some annual fee. If you are unsure, just consider value in exchange. Are you getting value for that annual fee? If not, consider closing the account or switching to a different card. One feature of credit cards that come with a higher annual fee is that they often come with useful insurances. For example: Travel Medical, Car Rental (Loss of use, collision), Extended warranty and so on.
There is often not a “one card fits all” for everyone. For that reason, I like to have a few credit cards that I can use in the situation that gets me very best terms AND features for my purchasing pleasure.
What’s in my wallet?
I keep cash back card that also offers no foreign transaction fee as I frequently commute between USA/Canada/Europe. Second, I keep a balance transfer card that offers me a 2% balance transfer card for 12 months. And last, I keep a line of credit VISA, so that if I need it, I can access cash very cheaply.