Our Relationship with Charge Cards

Jan 2018


There is no doubt we live in a world that is constantly changing. This year alone we are seeing numerous changes with regard to our personal financial affairs such as the change in tax laws. Because of the pace of change, sometimes you and I have a tendency to think if it ain’t broke, don’t fix it. In other words, if we could put things on automatic pilot and leave it as is, that is sometimes the preferred course. Unfortunately, we sometimes do that to our own detriment. Whether it’s broken or not, one area that we should occasionally look at is our relationship with our charge cards.

When it comes to charge cards, I’m frequently asked which one is the best. My answer is that there is no one charge card that’s the best; rather, the key is to find one that best suits your situation. How you use your charge card should be the determining factor in what charge card you use. Unfortunately, too many people focus on the rewards that a charge card offers; and, while important, they are not the most important thing. It sort of reminds me of the old days when banks, to entice you to open accounts, would give you a free gift such as a toaster oven. All too often, people focused on the toaster oven as opposed to the interest they received. The same is true with charge cards. People sometimes are so focused on the rewards that they don’t factor in how much those rewards are costing them.

The first step in determining which charge card you should select is identifying how you use your charge card. Do you use it as a means of convenience? In other words, do you pay your bill every month, or do you use it as a means of financing? If you do not pay your bill at the end of the month and carry a balance, then the most important thing you should focus on is what interest you are paying and not what perks you could receive. Many people are under the mistaken belief that all charge cards charge the same interest rate and are computed the same way; that is not the case. For example, some charge cards have a variable rate; while others are fixed. If you carry a balance on your charge card, your focus should be on the interest you pay. If you can have a charge card that is consumer friendly that charges a low rate of interest, that is one that you should consider. After all, if you could save a few percentage points on your interest, then that money will add up more than any rewards you could receive.

Whether or not you carry a balance, it is also important to look at all fees involved with the card. For example, some charge cards charge an annual fee, others do not. In addition, some charge cards have high fees if you are late on your payment and some even raise your interest if you’re not timely on your payments. These things are important. One late fee that you have to pay may wipe out any benefits that you may have accrued.

For individuals who do not carry a balance on their charge card and use it as a means of convenience, one key area is the grace period. The grace period is the time you have to make your payment once you receive your bill. Some charge cards no longer have a grace period; therefore, you start paying interest from the date of purchase. Even if you pay your bill on time, there still is an interest charge. Therefore, the grace period is extremely important for certain people.

As far as I’m concerned, only after you understand how you use your charge card and what fees are involved, should you consider the perks. Even though some of the perks sound great, some aren’t worth that much. The key is to focus on rewards and benefits that you will actually use.

I cannot stress enough how important it is that before you sign up for a new charge card that you read the fine print. Marketing materials may tell you one thing, but the fine print will give you the whole story. If you want to know about a charge card’s late fees, cash advances or policy regarding shopping in a foreign country, it is very important to read the fine print.

We all use charge cards; they are a fact of life in America. For the great majority of us, we depend upon our charge cards and they’ve become a very important financial tool for us. Because of that, it is important that we make sure we‘re using the right card at all times. Therefore, doing your homework and shopping around for the best charge card for your situation does make sense. There are lots of websites that you can use in your search. One website that I use that I’ve found very helpful is www.bankrate.com. They have a wealth of information on charge cards to help you select the right charge card for your individual situation.

Should you change charge cards three or four times a year? My answer is no. However, at least every few years it does pay to review your situation to make sure that you’re using the proper charge card. Just like everything else in our society, the terms of your charge card may have changed as well. Therefore, over the next month or so, why not spend some time reviewing how you use your charge card to determine if you’re using the right one or not. If you’re not, there’s no time like the present for a change. Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.