At the beginning of the year, millions of people aim to improve their lives by resolving to make major changes. Yet no matter how ambitious you may be about sticking with your resolutions throughout 2013, the majority of people don't last the first month, let alone the whole year.
That's why rather than giving you a long laundry list of resolutions to consider, I'm going to suggest just one thing that can make a huge difference in your financial life. Whether you're neck-deep in debt or well-off, taking control of your credit cards and making them pay off for you rather than for the companies that provide them will pay dividends throughout your lifetime.
The credit card trap
The danger of credit cards isn't inherent in the cards themselves but rather in the way so many people use them. If everyone paid off their balances in full every month and never incurred finance charges, then the credit card business would look a lot more like PayPal or other payment facilitators, where services collect a fee from merchants in exchange for immediate payment on purchases, and card users don't pay anything extra at all.
Where cardholders make mistakes is when they take advantage of the pay-on-time features that cards offer them. Lured by the promise of initial low teaser rates, naive card users charge up balances that they find themselves unable to repay in a timely fashion. Then, when rates revert to their normal high levels, cardholders find themselves facing the prospect of years of repayments.
Seeing the other side of the card equation
Meanwhile, many credit card customers don't fully understand just how lucrative the card business is. Consider these facts:
- Both MasterCard (NYSE:MA) and Visa (NYSE:V) set new all-time highs yesterday, with Visa having risen about 50% over the past year and MasterCard posting an almost 40% gain. Since its 2008 IPO, Visa has given shareholders a total return of about 150%, and MasterCard has done even better, with shares having more than tripled from the company's initial public offering in 2007.
- As of its most recent quarter, Visa said that the total volume of payments and cash transactions processed over its network during the preceding 12 months was $6.3 trillion, with 80 billion transactions made on 2 billion Visa cards.
- Issuing banks enjoy the largest interest rate spreads on credit cards of just about any product they offer. With most cards charging double-digit interest rates despite rock-bottom rates on deposits, Bank of America (NYSE:BAC), Citigroup (NYSE:C), and JPMorgan Chase (NYSE:JPM) have been able to hold up well even during periods with high default rates.
But the success of credit card companies doesn't have to come at your expense. By being smart with your cards, you can actually share in their profits, and sometimes even come out ahead of the card companies that so desperately want your business.
Resolutions for every cardholder
There are a number of things you can do to better manage your credit cards. Pick from the following two resolutions depending on your particular situation.
For those who carry a credit card balance, resolve to get it paid down as quickly as possible. In all likelihood, your card debt has the highest interest rates of any debt you have outstanding. Don't be satisfied with minimum payments; divert as much cash as you can afford to get those balances down. It's the best investment you can make.
If you've already mastered your card debt, congratulations! The next step is to find cards that will pay you. With dozens of rewards cards offering cash, airline miles, or other perks, look for card reward programs that fit well with your particular spending habits. For instance, frequent fliers can benefit from airline cards that offer miles as well as discounts on baggage fees and other charges. Other cards give you cash back, with higher rebate percentages for certain categories of spending.
Whichever resolution you choose, making it your primary financial goal for 2013 will pay big dividends both now and for the rest of your life. So don't wait another day; get going on the path toward financial security while earning the rewards you deserve.
Fool contributor Dan Caplinger owns warrants on JPMorgan Chase. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and MasterCard. Motley Fool newsletter services recommend Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.