This is a guest post from Kim Anderson of Thrifty Little Mom
“If I use my credit card I get a cash back bonus!”
“If I open a new credit card account today I can save an extra 10%?”
“Wow, if I transfer my current balance I can get 0% interest for a year?”
“Hey, I can get 20,000 bonus miles if I spend $1,000 on my card in the next few months!”
Do any of these statements sound familiar to you? I think that deep down inside, we all know the truth. In fact, I’m positive that the credit card companies know it. Credit card bonuses are like spending magnets. When we get it in our heads to purchase something with a credit card, we instantly start justifying the purchases with all the bonuses we’ll get. The question you should be asking yourself is this: “do I really need this or am I using these credit card incentives to make my irrational spending seem rational?”
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While credit card tricks can lure in even the most savvy spender, here are a few tips to avoid being caught in the trap:
Recognize Credit Cards for What They Are
When you use a credit card, you aren’t using your own money; you are borrowing money. The best thing you can do for your family is ditch the regular use of credit and stick with debit cards or CASH. You won’t be tempted to spend money you don’t actually have for things you don’t actually need.
Evaluate Whether You NEED it Now
Before you make a purchase on a credit card, consider if this is an item that you need now. Could you put the purchase off, save up the cash, and go back and pay cash without needing to borrow money from the credit card company? This kind of premeditated decision will most likely save you the most money.
Don’t forget about getting your spouse’s input on timing. There have been many times when I get really excited about something that I thought my husband was going to be on board with buying only to find out that he didn’t really want it or didn’t feel like we needed it at the time.
You may also find that just by walking away, you forget about the purchase altogether. Problem solved.
These kinds of premeditated decision making efforts will most likely save you the most money.
Make Sure You Aren’t Spending More For a Higher Cash Back Percentage
Some credit card companies offer higher percentage cash back bonuses for particular retailors or during particular seasons of the year. Are you shopping at those retailors simply because of the incentive? Could you get a similar item cheaper somewhere else without the cash back bonus? Always compare prices before you jump at cash back motivated deals.
Discover Card has cash back incentives that change quarterly. One quarter might give you cash back on travel while another quarter gives you cash back on entertainment. During the dining out incentive quarter we always found ourselves eating out way more simply because of the 5% cash back during that time.
Then we had credit cards that gave us an increased percentage back or discount by making purchases from an online retailer and accessing the retailer through the credit card company’s website. It was tempting to order something this way without comparing prices. Always compare prices before you jump at cash back or discount motivated deals.
Actually apply your cash to your purchase
When I used to use credit cards I often found myself seeing the return money as “a penny saved is a penny that’s mine to do whatever I want with.” When I bought the item, I mentally subtracted the cash back amount as a discount on the actual price of the item to help me rationalize purchasing it. But when it came time to choose how I was going to get my reward, I usually chose the coffee shop gift card. At the end of the day, I didn’t actually save my family money. I chose to spend our money on expensive coffee as if I were getting the coffee for free. If I had applied the cash to the bill, we would have more money sitting in our bank account.
When it comes time to choose your cash back return, consider applying that money directly to your monthly bill, or get a check and put it in your checking account. This choice validates why you bought the item in the first place- to save your family money.
Get the facts about signup incentives
One of the first store credit cards I signed up for was Victoria Secret. I had landed my first job and decided it was high time I started getting myself some quality undergarments. There was a huge sale going on and the saleswoman led me to believe that I could get $75 in sale merchandise for signing up for a store credit card. Without much investigation I thought, “Why not?”
I was misinformed. A month later a coupon book arrived in the mail that gave me $75 off merchandise split up on coupons spread throughout the year. One coupon per month. I was bummed. I should have read all the fine print about the bonuses rather than relying on what I was hearing the sales woman say. When a sales person tells you about a credit card sign up promotion, be sure to get some kind of physical description about what you are actually getting before you get too excited and be sure you read the fine print.
Beware of transfer fees
If you find yourself in a situation where you are wanting to transfer your debt balance from one credit card over to another with a 0% interest rate, make sure you read all the fine print associated with that transfer. Sometimes you will be charged a 3-5% transfer fee. So if you have $5,000 on the card, your fee could be $250. In that case your new balance on your new 0% interest rate card is $5,250. Then you usually only have about 12 months to pay that off before your interest rate can be over 20%! When you see 0% interest be sure that you are aware of how long it lasts, what the fees are and how much your interest rate will jump once that introductory period is over.
With credit cards, ignorance is never bliss. Always give yourself time to think about big purchases before you make them on a card, use your perks to actually save money and be an informed consumer. With that strategy you can avoid credit card traps in your future and save yourself some unnecessary debt and frustration.
Kim Anderson is a blogger and writer at Thrifty Little Mom where she encourages families to pursue financial freedom while finding joy in frugal living. She live is Atlanta, GA with her electrical engineer husband, her talkative 3 year old son and the family Beagle Bit. She has a slight obsession with iced coffee, has trouble taming her creative side and never leaves home without a coupon.
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Have you ever been caught in a credit card trap?