This post is by Stephen Guise of Deep Existence.
Credit cards are one of the most misunderstood financial instruments in the world. This is a fact—one that explains why VISA and American Express are worth about $60 billion a piece.
The interest rates on credit cards are actually illegal in many states, but a supreme court ruling changed everything by allowing credit card companies to only follow the laws of their headquarter’s state. Naturally, companies moved to ever-popular states such as South Dakota and Nevada because they had lenient usury laws.
Usury laws protect consumers from excessive interest rates. Since that supreme court ruling essentially removed them for credit cards, the rates regularly exceed typical usury limits, with one card charging as much as a 79.9% APR. Still, people are jumping at the chance to build up debt with double-digit interest rate credit cards. According to the USA Debt Clock, the USA has nearly $800 billion in credit card debt at this time.
Be on the winning side for a change
I just recently received a credit card that will allow me to take between two and four domestic round trip flights in the United States, free of charge.
Okay, it isn’t completely free. There is a $95 annual fee for this particular card. Still, I can cancel the card or negotiate that fee at any time, and I still get my flying benefits. I took advantage of a British Airways promotion that gave new customers 100,000 BA Miles (50,000 on first purchase and 50,000 after spending $2,500 in the first three months).
Before this card, I got the Amazon.com credit card. The card allows me to get a $25 Amazon gift certificate for every $833 spent on Amazon and every $2,500 spent elsewhere.
You know what things I really like? Travel and Amazon.com! So far, I have received about $600 worth of Amazon money. It was completely free. I did not spend a dime on anything I would not have bought otherwise. Later this year I will be traveling somewhere exciting for petty cash (you pay taxes for flights—usually $10 domestic) because of my British Airways card.
Why you can win
Credit card companies are statistics experts. You are a statistical probability in their eyes. They will always play the odds and come out richer as a result—the same reason Vegas always wins.
The difference between credit cards and Vegas is that we have complete control over what actually happens. I can pay off my credit card every single month on time (even automatically to ensure it). I can reap all of the benefits of the card without sacrificing much at all.
How to do it
First, have a goal in mind. Do you simply want cash back? Is there a particular store you shop at all the time? Do you want to travel? By car or by plane? There are so many different types of credit cards out there that it’d take a book to cover them all. This link is a great resource for getting started with research. The types of cards are listed in the left sidebar menu.
The idea is to find something you spend a lot of your money on and find a credit card that maximizes the rewards and perks for buying that particular thing or from that particular company. There are low interest cards out there, but if you’re looking for one of those, you’re planning on being on the losing side of the deal (paying ridiculous interest—”low” is probably actually a very high 10%).
Sometimes the sign-up bonus makes it worthwhile to get the card. For example, I have limited interest in the British Airways card, but the sign-up bonus is worth more than $1,000. This initial perk would take most cards several years to reach in rewards and it is available very soon after getting the card. Another bonus of the card is that it has no international transaction fees. So if I decide to use my miles to go to Fiji, I can use the card there without the typically exorbitant fees.
Pay the card off on time. Every time.
It is literally insane to pay 10+% interest on something. Give me guaranteed 10+% interest on my investments and I’ll be rich when I’m older. Pay 10+% interest on money you don’t have and you’ll be swamped in debt in no time. You can thank compound interest for this.
Make sure you understand the fees and conditions of the card you get. Don’t look at 12 months 0% APR and be surprised when it jumps up to 20% APR after that. I don’t pay attention to the APR because I’m not interested in paying these companies for no reason. Some great cards, like my BA card, have annual fees that are still worth it. Others have annual fees that the card does not justify.
I recommend doing as I do and “filtering” all of your purchases through your carefully selected credit card. Not only will this practice rack up some serious rewards and perks, but you’ll be building your credit score by showing you’re responsible with debt (which allows you to get better offers). I know of some people who were denied this great BA card deal because their credit score was poor.
I will leave you with possibly the best advice of all: check Slickdeals and search for credit card deals. This website gathers the best deals around the web and if there is an amazing deal out there, their community will find it. Better still, you can read the comments of people who received a similar deal before.
For this BA card, I read several stories of the miles paying for flights to Egypt, Canada, and other places that would have cost thousands. You might also read negative experiences with not being able to use air miles or other red tape that credit card companies sometimes use. If you do your research, you will get a good feel of what to expect from your new card.
VISA has been playing this game for years—but you can still beat them.
Written by Stephen Guise, who has a B.S.B.A. in Finance. When Stephen was willing to fail, he started blogging at Deep Existence. Rumor: American Express is considering giving customers the option to subscribe to Deep Existence at ATM terminals because reading the content there is almost like getting free money. I fully support this idea.