Beating the Credit Card Companies at their Own Game (from Ramit Sethi)

by Jamie Simmerman · 12 comments

This is the second installment in a mini-series from Ramit Sethi’s book, I Will Teach You to Be Rich. In case you missed the first post in this series, 3 Simple Steps Leading to Personal Wealth, be sure to check it out as well.

I struggled for a while with what to include in today’s post. There was a wealth of information in I Will Teach You to Be Rich, and it was an enjoyable read (how often can you say that about a personal finance book?), but I didn’t want to appear to be endorsing Ramit’s book since MoneyNing.com is an equal-opportunity promoter of all things related to personal finance. In the end, the section on credit cards won out because essentially, credit card debt is a very serious problem for many Americans, and probably quite a few others living outside the U.S.

According to the Federal Reserve’s Newsletter, the total U.S. consumer debt reached $2.5 trillion, with the total U.S. revolving debt (98% of which is made up of credit card debt) totaling $801 billion, as of December 2011. That’s a lot of people looking for a way to pay off those credit cards. You can win at beating the credit companies at their own games – and save money while improving your credit. Here’s what Ramit suggests:

  1. You need credit cards, but only 2-3 (not four like the average American). To help raise your credit score, you should keep two credit cards active. Inactive credit cards won’t help you, so use them on a regular basis, such as for paying for a reoccurring subscription or monthly payment. Your credit matters much more than saving money. As Ramit says, “Credit has a far greater impact on your finances than saving a few dollars a day on a cup of coffee.” David’s Note: Make no mistake. Both your credit profile and savings are important. When you are young, your credit may allow you to finance bigger purchases at a lower cost. But be disciplined enough and your savings will eventually become the biggest contributor to your path to financial independence.
  2. Pay off the TOTAL balance at the end of every month. This isn’t new advice, but it is solid advice.
  3. Set up automatic payments so you NEVER miss a credit card payment again. Ramit gives specific examples in the book on how a single late payment on one credit card can instantly drop your credit score by a hundred points! Add in the late fees and added interest and you’ll soon agree that you should avoid making credit card payments late for any reason. Ramit recommends setting up automatic payment through your checking account so that the entire balance is cleared on a set day every month.
  4. Never pay just the minimum payment due. Even chipping in an extra $20 a month will help drastically reduce the amount of interest you pay overall.
  5. If you can’t get a credit card because of your current credit history, try asking your local bank about getting a secured credit card, and moving up to a regular credit card with the same bank after a few months.
  6. Even when you carry a zero balance on your credit card, be sure to regularly ask for a limit increase. The more available credit your have with a zero balance, the better off your credit becomes.
  7. Don’t go hog wild. Open one new credit card account, then wait a year before opening another.
  8. Avoid retail credit cards like the plague – even if they promise to save you 20% of the purchases lying on the counter, don’t give in to the temptation. These cards often have awful terms and end up costing rather than saving you money.

The exception to these credit card “rules” is if you know you have little no control when it comes to spending. You know, those who will run up the balance and have trouble paying it off if they have a higher credit limit, or even own a credit card at all. But even then, you can always freeze your credit cards and still build your credit without using them.

If you know credit cards are dangerous for you financially, get rid of all cards and work on paying off what debt you have. Your best bet, in this case, may be to get a secured credit card from a bank that offers customers the option to turn off overdraft protection – meaning you can’t spend any more than you have in the secured account and won’t accrue any overdraft fees from over-spending.

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{ 12 comments… read them below or add one }

Financial Advice for Young Professionals March 29, 2012 at 11:39 am

What about credit card arbitrage? It’s definitely not for everyone, but you can make some real tax-free money waiting for sign up bonuses and signing up for credit cards without affecting your credit score too much.

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Herbert March 29, 2012 at 3:02 pm

I have had my ID stolen. Any suggestions as to how to obtain a credit card after a disaster like this?

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MoneyNing March 29, 2012 at 5:49 pm

Did you talk to all three credit bureaus about the incident? What did they say? I assume that if you can get the information off your record, then there’s nothing to worry about.

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Marbella March 31, 2012 at 5:55 am

Many wise counsel, but a lot wiser advice is to never get any credit card, only have a debit card that draws directly from your bank account.

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Jean April 1, 2012 at 7:27 am

Debit cards are not as safe as credit cards though. There is no sense of responsibility by anyone when it comes to debit cards since the money is being taken straight from your bank account but the credit card companies are more responsible and take a lot of measures to safeguard the card’s usage.

-Jean

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Financial Advice for Young Professionals April 7, 2012 at 4:33 pm

I agree, I’ve never had a problem challenging transactions on my credit card. CC companies are actually very good about this.

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Steph D June 7, 2012 at 8:04 am

Another tip: If you do have a balance that you are carrying, always check with rival card companies to see what kind of balance transfer rate they’re willing to give you. You may be surprised how low companies are willing to go to get you to switch. I’ve seen as low as 0.9% for up to a year!

You can then apply your payments to the principle instead, paying it off faster, and at the end of the promo, start shopping around again if you haven’t cleared it off.

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jane m July 8, 2012 at 1:24 pm

Steph D:

I would not change CC company to CC company with regularity, that will ding you on your credit report. I also learned that one should NEVER close out the very first credit card they have–that can ding you as much as a couple hundred points.

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Steph D July 8, 2012 at 1:46 pm

I wouldn’t cancel the cards, but if you carry 2 or 3 credit cards, and have a balance on one, look at transferring that balance to one of your other two cards that have nothing on them. Keeping the cards open won’t drop your credit rating, your total debt load doesn’t change, but the amount of interest you end up paying is a MAJOR difference.

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Meri September 26, 2012 at 11:22 pm

A person who buys a new Ferrari with a credit card is rich. A person who buys a new Ferrari with a debit card is richer.
I have one credit card (only) and when I use it I feel rather ashamed.

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Richard Lewis November 22, 2012 at 6:37 pm

Cash is King…………I have no credit cards……..pay cash …buying a car or a home…save save save…….If you have to purchase on credit you can’t afford it

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Ollie December 7, 2012 at 1:26 pm

I could say quite the same with Meri and Richard Lewis. Jamie, that quite a few living outside the U.S. is starting to grow in number and seems almost like trying to beat that number in the U.S. In a struggling economy like here in the Philippines, we’re better off without CCs I should say. For me and my family, the only advantage we see in CCs is the convenience of not having to bring big cash along with you. We get calls from banks time and time again, letting us try to avail of their CCs. We always turn them down. Why use CCs when you can pay in cash? What happened to the notion of saving for something before buying them? If paying through CCs is the same as paying for the item in cash, that would be great. But then, what CC company is doing that? There’s nothing to gain in that, right? So if paying through CCs always cost you even more, why use it unless it’s only for the credit score. I think uncontrolled and irresponsible buying through CCs is what’s affecting the U.S. economy right now and which in turn affecting all the other economies like ours here in the Philippines who are starting to get the hang of uncontrolled and irresponsible buying through CCs.

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