Jun
8

Credit Cards – Are They Ever a Good Thing?

Neil Douglas-Campbell on June 8th, 2009
This is guest post written by Mr Credit Card from www.askmrcreditcard.com. Mr Credit Card writes reviews on US credit cards. Unlike myself, Mr Credit Card has never carried a balance and uses credit cards for rewards. He is based in the US and while we disagree on whether credit cards are good or bad, we both agree that we should not have any credit card debt.
 
 
 

 

 

For the short period of time that I’ve got to know Neil, I have realized that he is against credit cards. Here is the US, there are also many advocates against credit cards. The most famous one being Dave Ramsey. I cannot blame anyone for having this view because many of the practices by credit card companies over the last few years have been disgraceful. In fact, it took a credit card bill of rights to potentially put right to many these shady practices. Here are a few examples.

  • Credit Card issuers have been known to deliberately allow card holders to charge over their limit. And then they slap them with an over-the-limit fee.
  • Issuers have been known to charge late fees because they claim they never receive a customers check on time!
  • They have sent their bill statement so consumers do not really have time to make sure the check arrives in the mail on time
  • They have canceled credit cards for lack of usage – That one I can understand as it is costly to maintain an account which is not used. But based on the US credit scoring system, this has affected lots of people’s credit score negatively
  • They issue lots of cards to college students by marketing through associations and clubs!
  • They give students a ridiculous amount of credit limits (like up to $10,000) when they shouldn’t)
  • They do not disclose that they compensate schools for getting their students to sign up
  • They practice double cycle average billing methods
  • They have been cutting credit lines on people who have always paid on time!

    • Yet, despite all this, for some people, credit cards can be of help in building a credit history because of the following reasons:

    Credit Scoring System – In the US, an individual’s ability of get loans or a mortgage depends a large part on one’s credit history. But to have a credit history, you need to have some credit. Without any credit, you can never have a “good” credit score or FICO score as they call it here. To get a very good credit score in the US, you’ll need to have a variety of credit under your belt. For example, having a mortgage, a car loan and a credit card would help. And if you payed your bills on time every month and you do not utilize all the available credit lines you have, you will achieve a good credit score very quickly.

    A good credit score means you will get lower interest rate on your mortgage or loans.

    Importance also extends to businesses – Most of the job growth in the US is in the so called “small business” area where an entrepreneur starts a business. To get a credit card for a business, a credit card company looks at the owners personal credit history (and not the business history). So if you are in the US and you have a business, and you need a credit card for yourself and your employees, you need a decent “personal credit score” to get a credit card. And if you business is not well established, your personal credit score can get you business loans you would never have access to if your score was no good.

    Important to rebuild credit after bankruptcy – In the US, many people file for bankruptcy because of massive debt burden that can be due to medical bills, lost of jobs and too much debt etc. Prior to and once they emerge from bankruptcy, their credit score will be very low. If the person got out of bankruptcy still current on his mortgage, then he or she can rebuild their credit faster as long they make timely payment on their bills.

    For those who do not own a home or a car, but intend to in the future (which is basically most people), then rebuilding one’s credit with a secured credit card may be a very wise financial decision.

    Hotels require credit cards for advance booking – Many hotels require credit cards for advanced booking. They need your credit card so that they can charge you with a cancellation fee if you withdraw at the very last minute. Car rentals also require credit cards for advance bookings.

    Sometimes Credit Cards Are Just Plain Dumb – Yes, sometimes credit cards offer deals that are too good to be true. Here are a few example of how credit cards have fallen over us consumers just to get us to sign up.

  • They offer us ridiculous cash back deals – Citi and Chase use to offer cards that paid 5% cash rebates on gasoline, supermarket and drugstore spending. They do not anymore. I found out from insider sources (and it does not take a genius to figure this out) that these cards actually lost money and were not profitable. That was because their card holders were savvy and paid their bills in full every month! As a result, cash back credit cards have less rewards these days.
  • They offered 0% balance transfer deals for free! – Yes, just two years ago, you could transfer a balance for 15 months without paying any balance transfer fees! – Folks were using this to pay off their Home Equity Line of Credit! Some savvy chaps even did a balance transfer deal and deposited the money in a high yield savings account, which was giving out 5% interest then!). Well, the credit card companies woke up to this and now it is harder to get a decent 0% balance transfer credit card offer these days.
  • They allowed you to apply for the same card twice – Yes, citibank was guilty of these. They used to have the Citi Dividend Card, which used to pay 5% rebates on gasoline, supermarket and drugstore spending. But they capped the limit to $300 in rebates you can earn a year. But they allow you to get a second card! They also frequently gave away huge bonus miles for their american airlines credit card. And they allowed you to apply for more than one card. What folks used to do was to apply for the gold card, get the bonus miles, then apply for the platinum card! Crazy stuff.Final Words – Before I go, I just want to thank Neil again for giving me the opportunity to guest post. And also to congratulate him to resolving his debt problems..

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