Managing your credit is one of the most important keys to
financial success. Good credit can make or break some landmark
moments in your life, such as buying your first home or getting
financing for college tuition.
But by now, any illusions you may have had that
banks and other lending institutions are somehow
on your side
should be gone forever. With
Bank of America
) , and
) among the big banks that agreed to pay more than
to settle a dispute about alleged foreclosure abuse
, you hardly need any further evidence that when it comes to
getting credit, you have to be on your guard at all times.
Make the most of your plastic
One key battleground where banks and consumers wage war is with
credit and debit cards. Over the years, the changing trends in
plastic have closely followed profit opportunities for the banks
that issue them. Consider:
- Credit cards allowed banks to earn fees from the merchants
who accept card payments as well as lucrative interest charges
from cardholders. For years, that
was enough for banks to earn hefty profits, even with grace
periods that allowed those who paid their balances in full
every month to escape finance charges and get free float on
- To get rid of the float problem,
banks started pushing debit cards
as an alternative to credit cards. Debit cards allowed issuers
to earn similar fees from merchants while eliminating all of
the credit risk associated with credit cards, as they could
immediately tap cardholders' bank accounts for payment.
- But recently, as new laws have clamped down on debit card
fees, banks are moving back toward credit cards -- and they're
pushing big rewards as incentives to get cardholders to
If you play your cards right, you can reap a lot of benefits.
But you still have to be careful.
Are rewards worth it?
Debit card rewards have largely become a thing of the past, but
credit card rewards are on the upswing. As SmartMoney described
in an article on credit cards, lucrative benefits like extended
0% interest periods, no-fee balance transfers, and big upfront
cash-back and rewards points bonuses have become more common
recently. For instance, recent data show that more than 80% of
card offers include 0% teasers on purchases. At the same time,
) recently offered some prospective customers 100,000 points to
take its platinum card -- redeemable for up to $1,200 in travel
or $1,000 cash. Citigroup and
) have made similar offers to select customers.
If you invest in these card issuers, don't fear for their
prospects. The reason these issuers are willing to pay so much
for your business is that they expect to make it back over time.
With a combination of sizable annual fees, merchant-related
income, and the potential for interest payments if you overextend
yourself, card issuers can turn even highly rewarding cards into
profits. Meanwhile, perks like 0% interest don't really cost
issuers that much -- especially when most of those banks are
paying their deposit customers little more than that on checking
and savings accounts.
In order to turn the tables on the banks, you have to be
ruthless -- and willing to take small dings on your credit
report. Closing out newly acquired cards after you earn rewards
but before you have to pay hefty annual fees or other charges can
give you a reputation for switching cards frequently, which in
turn can cost you a few points on your credit score. You have to
decide what your credit is worth, and whether the rewards you
earn are worth the cost.
It's your money
One thing is certain: Banks want to earn profits, and they're not
giving you any incentives to sign up for new products because
they want to do you a favor. But if you're opportunistic about
making the most of your credit, you can get some valuable rewards
and beat the banks at their own game.
Managing your credit is an important part of preparing
yourself for a financially comfortable retirement. But you also
need the right investments in your portfolio. Let me invite you
to look at three promising stock picks, which you'll find in the
Motley Fool's special report on long-term investing. But don't
wait; get your free report today while it's still available.
Fool contributor Dan Caplinger has entirely too much fun
using free card rewards. He doesn't own shares of the companies
mentioned in this article, but he does have credit cards from
Chase and B of A. The Motley Fool owns shares of Bank of America,
Citigroup, Wells Fargo, and JPMorgan Chase, and has created a
covered strangle position in Wells Fargo. Motley Fool newsletter
services have recommended buying shares of Wells Fargo and
writing a covered strangle position in American Express. Try any
of our Foolish newsletter services free for 30 days. We Fools may
not all hold the same opinions, but we all believe that
considering a diverse range of insights makes us better
investors. The Fool's disclosure policy gives you all the credit
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