Credit Card Trap: Avoid Being a Good Customer
Often, the thought of a valued customer brings to mind someone who pays the bill on time and in full. Cell phone companies and utilities like to see the balance paid off each month. And you could quickly be barred from a grocery store if you only paid a portion of your bill, and promised to make more payments later.
What makes a good customer for these types of businesses is completely different from what makes a good customer for a credit card issuer.
What is a “Good” Credit Card Customer?
It’s important to understand that it is in the best interest of the credit card issuer for you to carry debt. When you have a balance, but you can keep paying the minimum without too much trouble, you are the ideal customer. Being in debt enough to carry a balance and pay interest, but not being in to the point where you are ready to fold, is the sweet spot.
When you pay off your balance each month, the credit card issuer doesn’t receive the large interest payment. Plus, if you are savvy about earning rewards, the credit card issuer ends up providing you with a solid benefit, and doesn’t make as much money of of you. Indeed, credit card issuers make a great deal of money from credit card fees, and if you aren’t at least paying interest, or other fees related to slightly irresponsible financial habits, you aren’t making the issuer a lot of money.
As a result, you aren’t the “best” customer — no matter what the credit card issuer tells you. While using your card results in transaction fees that the merchant pays to the issuer, you aren’t providing the same kind of revenue that a chronic balance-carrier does.
Don’t Be a “Good” Credit Card Customer
It’s in your best financial interest not to be a “good” credit card customer. Instead, your financial interest is better served by being something of a nightmare for a credit card issuer. If you want to maximize your credit card use for you — and not for the credit card issuer — follow these steps:
- Figure out how much money you have to spend each month. Make sure that you are sticking to your “regular” budget.
- Once you know how much you want to spend, on everything from groceries to utilities, start making those payments with your credit card.
- Rack up the rewards with spending on things you would pay for anyway. Don’t spend just to spend, or to earn rewards.
- Pay off the credit card balance at the end of each month to avoid paying interest charges.
When you carry a balance, you quickly destroy the value of your credit card rewards. Credit card issuers don’t mind paying out rewards when they know that your carried balance will result in large interest payments for them. You don’t want that to happen, since it’s counter-productive and inefficient. Instead, make sure that you can pay off your balance each month. You will earn the rewards (cash back is an especially good reward), but not have to pay the interest.
It’s a clear win for you.
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January 18th, 2013 at 2:56 pm
[...] a time, taking care to pay off your credit card each month. The last thing you want to do is be a good credit card customer. Instead, you want to use your credit card regularly and use it as a way to earn [...]
January 26th, 2013 at 4:59 pm
If you already have credit cards, don’t get another one. Pay off the ones you already have. Use them and pay in full every month. You need at least 24 months of consistent, on time payment history to improve your score. Paying everything on time is how you rebuild your score, not adding more credit cards.