CREDIT CENTER: Manage Your Credit

The Hidden Perks of Plastic

How to use the bonuses that lenders don't advertise to work the system to your advantage -- not your lender's.

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By Dayana Yochim

Love your credit card. Be one with your credit card. Take a deep cleansing breath. Together now: "Om. Visa Ommmm."

You must think we Fools flipped our jingle-capped heads. We've been known to carry on a bit about the lending industry's less-than-centered ways. But the truth of the matter is that we Fools don't hate credit cards. We just don't like some of the underhanded practices we've seen some of them employ.

The reality of the matter is that credit cards aren't going away. They are one of the most widely used financial products, and their reach is growing. More than 80% of U.S. households have at least one credit card, according to CardWeb.com, keeper of stats about plastic. Just last year, more than 150 million new cards were issued. We even offer a credit card to give people an honest alternative. Given how much you probably put your credit card to use, you should at least make sure you're using it to full advantage.

Unfortunately, this idea has already occurred to your lender. He's cooked up a few ways to help you "get the most from your credit card." Need some quick cash for a vacation? How about a "convenience check" (or "cheque," for those impressed by Olde Englishe)? What your lender neglects to mention (or at least mention in a typeface that is readable by humans) is that those chequ... er, checks usually carry conveniently high fees, and a higher interest rate that has no grace period.

Another popular selling point starts appearing around November. The holidays are a heck of a time to remember to pay your bill. "So go ahead and take a breather from making a payment -- on us," they say. You won't get socked with a late fee or have your credit report marked with a delinquency. Oh, but there is that little matter of interest that is accruing if you carry a balance. Did someone forget to point that out? (These are just a few of the tricks up their sleeves. There are plenty more where that came from).

But there are true perks (besides those offered by rewards cards) to carrying a credit card that work to your advantage. Consider this:

Credit cards are convenient: We're starting with the obvious because, well, it's obvious. No need to bundle up a few gees to take on our tour of the canals of Venice or to hit Nordstrom's annual shoe sale (sigh). All you need to carry with you is one slip of plastic that can pay for your purchases down to the dime. Convenience is one of the lending industry's top selling points.

According to CardWeb.com, about 4 million retailers accept credit cards in the U.S., and more than 21 million worldwide. Add to that countless online merchants (more than 70% of online transactions involve payment cards), and the convenience factor grows.

So there you have it: Convenient for you -- and profitable for lenders. They take a cut from retailers who accept credit cards, so they are banking on the widespread convenience of plastic.

Compare the convenience offered by a credit card to that of a debit card -- which is linked directly to a person's checking account. Some debit cards have charging limits (e.g., you cannot put more than one $500 transaction on your card in a single 24-hour period). Try ordering a Dell computer online with one. (We did. No luck.)

There are ways around the limitations. You can use your debit card as a credit card by signing for purchases instead of using your PIN. If you do not have enough money in your account to cover the purchase, the bank will most likely cover the excess -- essentially acting as a creditor. But they'll charge a hefty insufficient-funds fee for covering your shortcomings.

Use their technology to organize your spending. If you're one of those people who has meticulously kept all of your credit card receipts since 1978, but has never managed to do anything with them, welcome to the club. All is not lost, though. Your credit card can help take your record-keeping to the next level without you having to spend weekend afternoons rifling through receipts.

You may have noticed how lenders are sort of sticklers when it comes to tracking your spending. Each month they send you a master receipt -- an itemized rundown of where your money went. They've already done the hard part -- now go ahead and use their record to help track your spending. (We'll dance around the word "budget" here lest you break out in hives.)

Some cards categorize your purchases and send quarterly or annual summaries on your spending -- including percentage breakdowns on what you spent at retail, dining, and dog-grooming merchants. Many let you track your spending online and review and print statements based on weekly, monthly, and yearly time periods, and even by category. You can even transfer the data directly into financial software like Quicken or Money.

If you're good about paying your bill in full, and on time, every month, your credit card can be a powerful budgeting tool.

Your card can bolster your image in the eyes of a lender. Frankly, there's no better measure of your creditworthiness than how you handle a credit card. It's as simple as that. When a lender wants proof of your gold-hearted ways, he consults your credit history for a black-and-white snapshot of your ability to: a) be deemed creditworthy by other lenders, and b) pay your bills on time and avoid spending benders.

There's a direct link to your creditworthiness and the amount of available credit you are given. While that doesn't mean that you should go crazy and open a dozen MasterCard accounts, you should consider using credit to establish a firm borrowing history, especially if you are going to apply for a large line of credit -- like a mortgage or car loan.

On the flip side, being a totally responsible user of credit by paying off your balance in full every month actually works against you! We find that alarming, but the truth is that while paying off what you borrow to the dime, every month, is noble -- not to mention Foolish -- an account that consistently reflects a $0 balance doesn't prove that you can use credit responsibly.

It gives you a float on a loan. Most credit cards offer you a grace period (if yours doesn't, dump it now). That means that if you have no balance on your card at the time of a purchase, you have anywhere from 20 to 30 days during which your lender will not charge you interest on your purchase. This is called the float, and it's pretty standard on all cards. It's a great breather for unexpected expenses -- like paying for an airline ticket you hadn't planned in your budget so you can attend your best friend's last-minute elopement. It also saves you from paying interest on a purchase that you eventually return.

The float is a nice convenience, but don't use it to get greedy. Some people use the grace period to game an already game-y system. But taking a cash advance from your card -- even after you factor in fees and interest -- to try to make a few bucks in an interest-bearing account is an accounting hassle that has too many opportunities to go wrong. And curses on those who use a low- or no-interest cash advance to invest in the stock market. Unless you have the super-power to determine the market's every move, there's no shorter path to financial ruin.

You can use their desperation to your advantage. Here's a trick that Fools the world over have employed. What do you want your lender to do for you? Waive the annual fee? Lower your interest rate? Forgive a late fee? Call you on your birthday? All you have to do is ask. That's right -- just ask. The lending industry is so extremely competitive that it's in your lender's best interest to keep you from walking to one of his competitors. The cost of wooing a new customer ranges from $50 to $150 per account.

The ploy with the most impact is to play the "Top This Rate" game with your lender. If you are trying to pay down a balance on your credit card, a lower interest rate will enable you to do so much faster. Though it is not as easy as it once was, getting your lender to play ball and knock off fees or points from your interest rate can pay serious dividends in your favor.

Lean on their corporate might. When you make any purchase with a credit card, you've got someone -- a big someone with a lot of corporate pull and possibly a baseball stadium named after them -- on your side. When buying a high-priced item, putting it on your credit card gives you immediate purchase protection that you just don't get when you pay with cash or an ATM card.

Most cards boast of their purchase protection program -- saying they'll replace an item you bought with your card if it is lost or stolen. (There are a lot of limitations, so make sure to check the fine print.) Some credit cards automatically extend your product warranty when you use it to pay for a purchase. And if the merchant doesn't deliver on his promise to you, your lender can take up the fight on your behalf. After all, it's ultimately their money on the line. Let them be the big heavy for you.

Let your lender play cops and robbers. If you're the victim of theft, first call your mother to let her know that you're OK. Then call your lender. Most credit cards are very responsive about working with customers to resolve theft issues. Fraud is one of the industry's biggest money busters -- card issuers lose about $1 billion each year to credit card fraud, according to CardWeb.com. Most lenders hold you liable for just the first $50 of a crook's spending spree. (Many will even waive that amount if you ask kindly, between sobs.) With the growth of online account access, customers are able to spot fraud well before their next card statement arrives via snail mail.

If a thief manages to wrestle away your ATM card, which is directly linked to your checking or saving's account, you may lose whatever money is in your account as the crooks charge and charge until your balance runs dry. Because of this quirk, a lot of banks have started implementing similar protection measures as offered by their credit card brethren. Just to be sure, check with your customer service reps before you leave home with a check card.

Those are some of the hidden -- and not-so-hidden -- perks of plastic. Use them for good instead of evil, Fool.