Use Your Credit Card to Get Out of Debt
Credit card companies are working to entice their favorite kind of customers: those who carry a balance of $5,000 or so, run it up occasionally, and then pay it back down. That keeps interest payments coming in regularly without exposing the card issuer to too much risk.
To keep these customers happy, and to gain more like them, credit card companies have been using rewards programs. Now they’re offering savings plans as well.
Some cards automatically deposit a percentage of your monthly usage into a savings account. Other, such as Discover, offer rewards for paying down your debt.
Under one of their programs, customers who make 6 on-time payments in a row are rewarded with cash back in an amount equal to the next month’s interest.
Not surprisingly, polls taken on behalf of the credit card industry show that up to 75% of all consumers prefer cash back to merchandise, hotel discounts, or airline miles.
The new cash back offerings are an attempt to establish customer loyalty by giving them what they want on a consistent basis.
So how can the credit card help me get out of debt?
First, choose a card with no annual fee, a reasonably low interest rate, and cash back on all your purchases.
Next, ask for a credit line equal to at least twice the dollars you intend to spend monthly. This is to keep your debt to available credit ratio down. If you can, that will allow you to charge all your monthly expenses without going beyond 30% of your available credit.
Now, use that card, or a combination of cards, for all of the purchases you would normally pay by cash or check. This includes gasoline, groceries, drug store purchases, clothing, etc.
Next is the tough part: Resist the urge to let a balance ride. Pay that bill in full, on time, each and every month. Remember, you won’t have been spending any money out of your checkbook aside from things that can’t go on the card – such as your mortgage.
If your monthly bills total $2,000 and you get 1% back, that’s $20 extra that you can apply to your mortgage or your car loan – or to some other credit card that you need to pay down.
