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There are several kinds of credit cards in common use today: store cards (examples: Macy’s, Marshall Fields, Gulf Oil); hybrid store/bank cards (Bloomingdale’s Visa); bank cards (First Chicago Visa, Wells Fargo MasterCard); travel and entertainment cards (American Express, Diners); some crossbreeds (Discover Card). Each has its pros and cons. In this section, we’ll first explore the general pros and cons of credit cards. Then, we’ll get into specifics about the pluses and minuses of each.
The Pros and Cons of Credit Cards
While there may be plenty of problems with credit cards they are often very useful and can certainly help you in your financial life.
Credit Card Freebies. One big advantage of using credit cards is that many cards today offer free stuff to encourage you to get or use one particular card. The card companies, as discussed later, prefer not to compete on interest rates and other card costs. So they have come up with stuff to hand out that is less expensive to them than cutting interest rates and fees would be. Some of that stuff can be very valuable to you if you pay your balance in full every month. If you don’t pay your balance every month, the heavy interest you will pay to the card company is almost certain to far outweigh the value of the freebies you get.
The freebies take many forms:
• Cash rebates on purchases—say, 1 percent on annual purchases totaling over a certain amount and a smaller rebate on a smaller annual total. At the end of the year you get a credit or a check for the rebate amount.
• Future purchase discounts (usually only on store cards or store/ bank hybrid cards). For example, Bloomingdale’s provides bonus points that can add up to gift certificates for each charge. Eddie Bauer sends out certificates good for ten or more dollars off your next purchase when you use its card for a couple of hundred dollars’ worth of charges. These programs can save you lots when you make substantial purchases at one retailer.
• Frequent-flier bonus mileage — a 2 percent discount on everything you buy. All the major airlines have credit cards affiliated with their frequent-flier programs. These are bank cards, not cards issued by the airline. The easiest way to join these programs is to pick up an application at the airport or airline city ticket office. Once you get one of these airline-affiliated cards, you will receive a frequent-flier mile for each dollar you charge. Those miles are worth about two cents each. Since you can use your frequent-flier Visa or MasterCard (American Express and Diners have similar programs with the advantage that their miles do not expire in three or so years as do miles on most of the other frequent-flier cards) to buy just about anything today, you can get miles on everything you spend. For example, I talked to a Chicago businessman who was building his family a new house. He charged more than $200,000 worth of materials on his airline card and got several free trips to Hawaii . He was careful to use a card with no mileage cap. Some of the airline-affiliated card programs limit the amount of charges that get mileage credit to $50,000 or so a year.
• Two-for-one flights around the country. Several of the airline cards offer a two-for-one voucher (which could be worth several hundred dollars to you) if you apply and are accepted for their card as an incentive to apply. The American Airlines program has done this fairly often. Generally, the offer is made to new members of the airline’s frequent-flier club (membership is free simply by filling out an application for the club) by mail in the welcome package sent to new members. So on joining an airline’s club, you may well get such a two- for-one voucher offer. But what about after you use that voucher to take your significant other to San Diego ? You can negotiate with the credit card company for another voucher or an annual fee waiver when renewal time rolls around, especially if you fly a lot on the affiliated airline and also make big charges on the card. When the annual fee appears on your statement, just call up customer service, tell them you are thinking about canceling the card, and ask if they will waive it. Often they will, year after year. Or they will offer you another two-for- one flight voucher to get you to pay the annual fee and stay a member. Sometimes it helps to mention that you know of folks who got a new voucher by canceling the card and reapplying. Say to the service representative: “Why put the company and yourself to the trouble?” If you don’t get what you want, there is nothing keeping you from switching to another airline’s frequent-flier card. A good source of up-to-date in formation on these programs and current bonuses is Best Fares Magazine in Arlington , TX (800-880-1234, http://www.www.bestfares.com).