How hard are your credit cards working for you?

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September 5, 2008

By Guest Blogger Craig Mirabella

Why talk about credit cards on an RV forum?  Well, you’ve got a lot to gain, that’s why.  Please read on…

This is my first post here on blog.rv.net, so before I begin, I’ll give you a little information about me:  My name is Craig Mirabella, and I live around a cluster of seaside towns in beautiful California.  I have a marketing background that spans various industries, from Rving, financial services (credit cards, lending), entertainment, publishing and insurance.  Plus, I like to write – I have my own personal blog, as well as a blog about credit cards.  So, naturally, when I was invited to be a blogger here, I jumped at the opportunity to provide useful and thought provoking content for you readers here at blog.rv.net, while keeping my subject expertise at least somewhat relevant to you, the RVer, but more importantly you, the consumer.

Just a quick note: While I hope (and intend) to be a regular here, my rather busy schedule often prevents me getting around to my hobbies (like writing blogs), but I commit to you that I’ll do my best, and I’ll keep my posts truthful and unbiased.

Anyway, let’s begin.  Forgive the following lengthy post, but it’s an important one! As my first topic today, I’m choosing to ask you to ask yourself some very important questions about your finances and, more specifically, your credit card habits, and I hope to open a few eyes to the “goldmine” that can be had just by continuing to do what you do every day.  Some of this is basic information you’ve heard before, but other info should be new (and hopefully useful) to you.

First, I want you to identify yourself as one of the following types of customers –  You either a) carry a balance on your credit cards (you’re known to the credit card companies as a “revolver”)  b) pay your credit cards off in full every month (you’re known as a “transactor”), or c) refuse to use credit cards (I don’t know if the credit card companies have a name for you, but let’s assume they call you the “ignorer”.  Then, read the section below that applies to you:

READ THIS IF YOU ARE A “REVOLVER” AND CARRY A BALANCE ON YOUR CARDS EACH MONTH: If you carry a balance, you’re not alone – roughly 60% of Americans are floating in the same boat as you, and if you’re like them, it’s likely because you can’t pay your balances off in full.  As a result, you’re constantly getting hit with more and more interest charges each month.  If this describes you, there are a couple of things you can, and should, be doing:

•    Dip into your savings to pay off your bills. Your credit cards are probably charging you an average interest rate somewhere between 10% and 20%, possibly more.  However, the money in your money-market account is only earning ~3%.  So, if you leave money in your savings when you could be paying off your credit card debt, you’re only costing yourself money each month (the difference between your credit card interest rate and your savings interest rate, multiplied by your credit card debt).

•    Apply for a new card. Ok, now you’re thinking “this guy is crazy”. But, rest assured, I’m not!  There are literally hundreds of credit cards out there which will allow you to transfer your old credit card balances to your new card (up to your new credit limit amount) while taking advantage of ridiculously low APR rates – sometimes even as low as 0% for 12 months or more!  But, of course, there’s a small catch – these transfer deals often come with small fees for the balances transferred.  Just make sure you will save more money on interest than you’ll spend on the transfer fee.  If you do this, make sure you search out a card that ultimately offers an interest rate as low as you can find – such cards likely won’t offer rewards programs because these programs are often partially funded by higher interest rates.  Also, if you do this, don’t use this new card for purchases while you’re paying down your transferred balance.  Why? The reason is simple.  Credit card companies usually will apply any payment to the transferred balance (or the balance with the lowest interest rate first) so that they can charge you more interest on your other balances, like purchases and cash advances.  While you’re chipping away at the transferred balance, the purchases and cash advance balances don’t get any smaller!  So the simple solution is to use your other cards for purchases – just be careful not to get yourself back into deep debt.  Better yet – try getting in the habit of paying your bills off in full each month!

•    Take advantage of balance transfer checks. Most credit card companies will often send “promo-rate” checks to you to entice you to transfer your balances from your other cards to their cards.  As with above, the same rules apply – you’ll likely see some type of transfer fee, and your balances will be reduced on the lower-interest balances first, so try to avoid racking up additional charges on the card to which you transferred your balances.  One more word of advice here – be sure to pay your minimum balance due (or more, if you can afford it) each month.  If you’re late at all, your bank may cancel your low rate and give you an interest rate that scrapes the stratosphere!

READ THIS IF YOU ARE A “TRANSACTOR” AND PAY YOUR CREDIT CARDS OFF IN FULL EACH MONTH: First off, congratulations.  You’ve avoided the pitfalls of credit cards and, more importantly, you’re in control of your finances.  Therefore, you deserve a reward!  What kind of card(s) do you have?  If you’re like 72% of Americans, you’re carrying a card that offers some type of reward program – cash back, airline miles, merchandise, hotel stays, etc. and so forth – there are hundreds of rewards cards out there, all designed to reward your loyalty for using a particular credit card.  If you’re not carrying a rewards card, either get one or go get your head checked because you’re costing yourself serious loot.  With that said, now, I’m going to teach you how to maximize your rewards:

•    Make sure you have a card with a rewards program that matters to you. Believe it or not, there are a lot of card holders out there who have rewards programs, but never take advantage of them.  Well, I’m here to tell you that’s just plain stupid!  Why?  Because there’s so many different types of programs out there, there’s bound to be one that will peak your interest.  If you don’t like your current rewards program, find one that interests you and start paying yourself back with everything you buy.  Since you’re an RVer, maybe you want to get rewarded with free gas, free camping or free RVing memberships.  There are a few excellent card programs out there for you – the important thing is to find the ones that will allow you to maximize your rewards.

•    Using two or more rewards cards is OK (and often beneficial). Provided you’re paying all of your bills off on a regular basis, it’s OK and often very beneficial to use two or more cards to make sure you’re getting every penny back.   Since many cards will offer different quantities of “points” or “miles” back for particular types of purchases, figuring out how to maximize your “point return” is relatively simple – you just need to DO THE MATH!

To know if a particular card is right for you, there are two numbers need to calculate.  The first is your “earn rate” and the second is your “burn rate”.

For your earn rate, take a look at the average percentage of money you spend in each of your reward categories, and determine your “weighted average” earn rate.  So you can more clearly understand what I mean, follow the example below of my own personal spending over the past three months and how my “earn rate” differs by the type of credit card I use.

In the first chart below, I assume that I’m making all of my monthly purchases on a credit union rewards card, which gives me 2% back on groceries, 5% back on gas, and 1.25% back on everything else I buy.  When I take into consideration my spending habits, I’m effectively putting 1.76% of my charges back into my pocket by way of rewards (this assumes that one point earned equals one penny, which is a general rule of thumb for most programs):

CREDIT UNION CREDIT CARD
Expense Category    Rewards Value    % of Total Spend
Supermarket                       2.00%                       18%
Gas                                     5.00%                       10%
Hotel                                  1.25%                        30%
Airfare                                1.25%                       15%
All other                             1.25%                        27%
Average                           1.76%                     100%

The next chart below assumes I’m making all of my monthy purchases on a popular hotel rewards credit card, which gives me 5% back on my hotel stays, 2% on airfare purchases and 1% back on everything else.  Given my spending habits, this card returns me 2.35% of my total charges back into my pocket…

HOTEL REWARDS CARD
Expense Category     Rewards Value       % of Total Spend
Supermarket                       1.00%                     18%
Gas                                    1.00%                      10%
Hotel                                  5.00%                     30%
Airfare                                2.00%                     15%
All other                             1.00%                     27%
Average                           2.35%                   100%

HOWEVER, if I were to use each of my cards only where I get the most “bang for my buck”, I can earn an average of 3% back on all of my purchases combined!

BLENDED CARDS (MAXIMIZED)
Expense Category    Rewards Value    % of Total Spend
Supermarket (Credit union)    2.00%                18%
Gas (Credit Union)                  5.00%                10%
Hotel (Hotel card)                   5.00%                30%
Airfare (Hotel card)                 2.00%                15%
All other (Credit Union)           1.25%                27%
Average                               3.00%              100%

So, you see, just by understanding your rewards, and by being smart about how you use your cards, you can really maximize your return on your shopping needs!

Now when it comes to redeeming all of these points you earn, you need to be equally as careful to make sure you’re getting your money’s worth, because points ARE money!  The way to “beat the house” so to speak is to maximize your “burn rate” – the rate at which you spend your points – try to redeem your points for something that makes your points more valuable than one penny each . Typically this will be done by redeeming for something that is related to your card’s program, like hotels, or airlines.  Consider the different options to redeem 25,000 points and the inherent point value for each option:

•    25,000 points for an airline ticket that you’d otherwise pay $400 to buy.  This translates to a value of $0.016 per point – pretty good!
•    25,000 points for a $200 gift card at your favorite merchant.  This translates to a value of only $0.008 per point (4/5 of a cent) – terrible!  This is only half the value of the airline ticket!
•    25,000 points to get a popular brand digital camera that you could buy in any store for $175.  This translates to a value of $0.007 per point (7/10 of a cent) – downright pathetic!

The obvious choice above is to buy the airline ticket – you’re getting the most value for your “money” and you’re burn rate is lower.  As a general rule of thumb, I always try to redeem for the best deal – in my case, it’s hotel rooms with my hotel card (which gets me a value of about $0.02 per point) and cash back with my other card ($0.01 per point).  As long as I’m getting a penny or more, I know I’m doing OK.

READ THIS IF YOU ARE AN “IGNORER” AND REFUSE TO USE CREDIT CARDS:  Let me guess – you probably have oodles of money sitting under your mattress, and you recycle paint cans into planters.  You probably also think that credit cards are evil and represent everything that’s wrong with the economy.  But did you know that by NOT using credit cards, you’re actually costing yourself money??  Now that you think I’m off my rocker, just keep reading, and you’ll understand the errors of your ways…

First, you are the most responsible type of consumer there is.  You only buy stuff when you have the money for it.  You probably write checks for everything or use a debit card/check card that pulls the money directly out of your account when you’re buying something.
I commend you for your financial responsibility, but you need to open your eyes.  If you haven’t read the section that says “READ THIS IF YOU ARE A “TRANSACTOR” AND YOU PAY YOUR CREDIT CARDS OFF IN FULL EACH MONTH”, you need to go read it – now.  Don’t wait.  Every penny you continue to spend using checks and debit cards is costing you big.

Since you’re so responsible, you’re certainly responsible enough to manage using and paying for a credit card – so, instead of using checks and debit cards, just open up the best rewards card you can find (check www.indexcreditcards.com for over 1,200 cards to suit your needs) and use that card for EVERYTHING you buy – you’ll rack up rewards so fast that your head will spin, and you’ll never worry about carrying a balance.   I do this faithfully, and as a result, I’m able to take my family of four on great vacations to Hawaii, the Caribbean, Mexico and more each and every year at some of the best hotels for the small sum of $0.  That’s right – free vacations every year (that even includes airfare), just because I use my card for everything I already have to buy (including business expenses).  And, since I opened my card account 4 years ago, I’ve paid exactly $0 in interest because I pay my bill off in full every month.

So, I encourage you to go find that card of your dreams – the one that’s going to give you the things you want – whether it’s airline tickets, free camping, hotel rooms or just plain cash back – just remember, use your cards wisely (reread how to maximize your earn rate) and make sure you’re getting your “money’s worth” when you’re redeeming your points.  With a little effort and attention, you can really benefit from the right credit card program!

Leave a Reply

10 comments

  1. Bob

    Actually there are NO credit cards that “peak” your interest but there are many that can PIQUE your interest. Peak is the top of something, for example, a mountain. PEEK is a sort of sneaky or short look at something.

  2. Don

    Good article!
    I have one thing to add for the ‘Transactor” – set your credit cards to pay automatically out of your bank account.
    You no longer have to worry about late payments or interest charges.
    Just be sure you have the money in your bank account and you will be a good financial manager.
    Also, the charge is made on the last day that your payment is due so you usually gain on when the money is taken from your bank account.

  3. Welcome to RV.net!

    Thanks for an interesting analysis.

    I second the suggestion for payment of your credit card via a direct debit out of your checking account. That’s especially useful if you spend much time on the road, since you never have to worry about being late with a payment.

    Even “Revolvers” can use this technique – just set up your account to make a payment large enough to cover at least the minimum purchase. However, as Craig points out, failing to pay the balance due each month can quickly put you “behind the curve.”

    Finally, you can do a transactor-revolver hybrid with a direct debit. I’m normally a transactor, but I have my primary credit card account set up with a small automatic payment that’s enough to cover my minimum payment. I then pay the remainder of the balance before the due day, but the direct debit gives me some peace of mind that I’ll never be late in case I’m on the road near the time to make that payment.

  4. Craig Mirabella

    Thanks to Bob for the English lession – he’s absolutely right – sometimes when I’m writing a blog so fast, I forget proper grammar!

  5. Everett

    Hi Craig

    I’m a Transactor. I have a visa milage rewards card. The rewards can be used to pay back to my account or buy an airline tickett or cash to me. If i use it to buy anything then it dosen’t get back to my account for additional rewards. So I’m wondering if I should find a different rewards type credit card like your Credit Union card? I’m not sure if you use it as money how it would get back to the account.

    Everett

  6. Ken Henry

    What is the general feeling of the “Good Sam” credit card. It seams that the card will be benificial for the RV’er?

    Has anyone been using the card with success?

    Thanks…Ken

  7. Craig Mirabella

    Hi Everett – Congratulations on your status as a transactor – that’s exactly where you want to be. First and foremost, that is your greatest reward – you are using OPM (other people’s money) to temporarily fund your lifestyle until your bill becomes due. And, since you have a rewards card, you’re getting something a little extra for free.

    Given the way you described your current card, (as a Visa Mileage Rewards), I’m assuming it’s the United Airlines Mileage Plus card from Chase – if that’s the case, then at best you’re getting about a penny back per dollar spent (1 mile for every dollar spent on eligible purchases). Remember, that’s about the average you can expect, but you CAN do better. In researching this card, I noticed it comes with an annual fee too, of $60. My personal opinion is that you can do better than this card (if indeed this is your card), since you’re not benefiting from the annual fee – there are plenty of rewards cards out there that don’t charge an annual fee. The annual fee is probably imposed because it’s a Visa SIGNATURE card, which gives you a few benefits like concierge service and additional warranty protection. However, if that’s important to you, I do know of other Visa cards that come with the same SIGNATURE benefits without the annual fee!

    One more thing – on the specific credit union card I mentioned, it’s restricted to certain members/family of the military, government, etc, so that may not apply to you. Bbut there are so many great cards out there, you just have to do some searching. As I mentioned, indexcreditcards.com is a terrific resource to find the card you need, as they list over 1,200 cards.

    Thanks for reading!

    Craig

  8. Craig Mirabella

    Hi Ken –

    You’re inquiring about the Good Sam Credit Card. As I mentioned in my post, I commit to keep my posts unbiased. I am employed RV.net’s parent company (as disclosed in my author profile) which offers the Good Sam card, and I do not want to come across as promoting that specific card (it would be editorially unethical of me!)

    What I can say is this – of the credit cards that cater to RVers, the Good Sam card offers very strong rewards platform if you do a lot of shopping at Camping World and/or buy a lot of products and services from Good Sam. On these purchases you will earn 5 points per dollar (same as 5% back) and one point on everything else. And, it offers a very wide range of redemption options from RV specific products and services, to gas gift cards, free camping, merchandise and cash back (via statement credit) to name a few. It also comes with no annual fee and happens to be a Visa SIGNATURE card, so you get the concierge service, additional warranties, etc.

    Thanks for reading,

    Craig

  9. Dave

    On that credit union card–it looks a lot like a card I have with the Pentagon Federal Credit Union. You can join this credit union as a civilian member by joining the National Military Families Association ($20). See this link: https://www.penfed.org/howToJoin/overview.asp; look at number 6.

  10. freeestyle_freddy

    All the comments here have been great and I agree with them all. I too have used cash rewards cards since they came out for most all my purchases and have used several types together to maximize my rewards, but there is one point nobody has mentioned yet. I do believe to some degree what Dave Ramsey, the financial guru, says and that is that when you have a credit card in your pocket you are more likely to buy those items you might not purchase if you had to come up with the cash at that moment. My feeling is that all but the most incredibly self-disciplined among us probably spend at least the equivalent of our rewards savings on stuff we would not have bought if we only carried cash. If we keep our “extra purchases” to a minimum and don’t specifically take our reward savings and spend them on a trip to Hawaii on top of the “extras” we bought then we haven’t hurt ourselves and we have the use of those “extra” items to make our lives more enjoyable. If, on the other hand, we spend the 20-30% more on purchases that Dave Ramsey and others claim because we have access to a card, then we are hurting ourselves. We still have the 3-5% reward savings back in our pocket but we spent far more than we otherwise would have in the process. Just something to think about . I fall into that category of probably spending about the equivalent of my reward savings on extras I would not have otherwise bought just because I’m not limited by the cash in my pocket.