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Using a Low-Rate Credit Card to Your Advantage

Written by Curtis Arnold
Posted On: September 23, 2008

An excerpt from How YOU Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line.


The three Keys to Using a Low-Rate Credit Card to Your Advantage:

1. Make your payments early.

If your card issuer uses the average daily balance method to calculate interest (most do), make your payments before the due date to reduce the interest bite. According to Nancy Castleman, cofounder of GoodAdvicePress.com, lenders are required to credit your payments when they are received, so the earlier you pay your credit card bills, the lower the average daily balance will be. The less you owe, the more you’ll save in interest. Bottom line: To save the most, pay as early as you can-and as often as you can, for that matter.

2. Avoid the dreaded default rate.

With any card, particularly a low-rate card, make sure you always do the following:

  • Make your payments on time.
  • Never exceed your credit limit.
  • Don’t write a check for payment that is dishonored.

Otherwise, you might end up getting hit with a default (aka penalty) rate, which is normally much higher and can be over 30%. Ouch!

You should know the default rate of your current cards and any cards that you’re considering. (Check the Schumer Box.) Perhaps more important, pay attention to what can trigger the default rate.

Especially if you can’t trust yourself to follow my tips to avoid a rate hike, look for the lowest default rate you can find. Some smaller card issuers, such as Simmons First National Bank in Arkansas, offer default rates in the mid-teens, while the average default rate in 2007 was 24.51% according to Consumer Action.

Finding out what triggers the default rate can be a challenging proposition because this information is not normally adequately disclosed. Fortunately, you can easily search default rate triggers by perusing the New York Banking Department’s quarterly online survey.

One worst-case scenario should encourage everyone to pay their bills on time: Some lenders charge a default rate if you’re only one day late making one payment. Other issuers institute a penalty rate if your monthly minimum payments are late twice in any portion of a 12-month period. Exceeding your credit limit is also a common default pricing trigger.

Finally, those late payments with other creditors, or even late payments to utility companies can result in default pricing. That controversial universal default clause can cost you money here, too, as can that lovely phrase, “anytime for any reason.” That’s where issuers can raise your rate strictly based on information in your credit report or a change in your credit score (more on this practice later).

Already paying a default rate? Find out what you have to do to get your account changed to a lower rate. Some lenders require you to make 6 or 12 consecutive on-time payments before the rate returns to the normal purchase APR. But the policies vary greatly.

3. Consider credit score implications.

Every time you apply for a new account, your credit score usually drops a few points. As a general rule, I recommend that you don’t apply for more than one new account every 6 to 12 months.

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A similar question that I am frequently asked is, “How does taking advantage of multiple balance transfers affect my credit rating?” View points on this vary from “Risky” because of all of the open credit accounts that it produces, to “It really doesn’t change things much.” The general consensus among experts is that you credit ratings will not be adversely affects…as long as you do not do so excessively. In fact, some experts, including myself, maintain that “balance transferring” can actually improve your credit rating, at least in some instances.

More important, be careful not to use most of the credit limit on any of your cards (commonly called maxing out a card). Doing so really causes your credit rating to suffer. Ideally, you want to use only 10% or less of your credit limit. The higher your utilization, the more your score will suffer.

Finally, never make a late payment-never! Not only will this affect your credit score (generally when you are 30 days or more late), but as I’ve already showed, just one late payment could raise your low rate to exorbitant levels. And if you have more than one card, that single late payment can have a domino effect, with your other cards hiking up your rates.

For more tips on using low-rate credit cards, and other valuable credit card tips, check out Curtis' new book, How YOU Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line.

About the author:
Curtis Arnold
Curtis Arnold, a nationally recognized consumer educator and advocate, has been educating consumers about credit cards since 1998. New! Curtis is the author of "How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line" (FT Press, 2008). He is also the co-author of the upcoming Complete Idiot's Guide to Person-to-Person Lending (Alpha Books/Pengiun Group USA, April 2009), a contribitor to The Ultimate Allowance (InnerWealth Publishing, 2008) and is extensively featured in 42 RulesTM for Driving Success With Books (Super Star Press, January 2009).
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