If an individual is going to be purchasing a vehicle with a loan or a home in the next few years, it would be vital to manage their credit properly. It might not show up as a loss to them today, but if they are offered a slightly higher interest rate on a home a year from now even if the interest rate is half a point higher on a mortgage, that will equate to thousands upon thousands of dollars of interest charges over the life of a mortgage loan." —VanderToolen, finance counselor
Michael Dolen remembers that day 10 years ago in Adrian, Mich., when a large delivery truck T-boned the Ford Taurus he was driving. The impact crushed his side of the car and also just about everything on the left side of his body.
Insurance paid for most of the 18-year-old's painful surgeries, but coverage for specialists was outside his health plan and cost him 50 cents on the dollar. There was no way his single mom could help pay those bills, and there was no way Dolen was going to sign up with the 26.9 percent interest rate "financing plan" the specialist's office offered him.
So he put the bill on a credit card.
Three years later, in 2006, Dolen made his last payment and hadn't spent a penny in interest. "I strategically used credit cards to beat the banks at their own game," Dolen says.
His experience paying off his crash led Dolen in 2008 to found CreditCardForum.com, a website where consumers rate and compare credit cards. It eventually became a full-time job.
For many Americans, their full-time job may have to do a lot with making minimum payments. The amount of credit card debt per U.S. household averages $7,073, according to a new analysis by NerdWallet.com. If you look at the average credit card debt for those households that have debt, the average rises to $15,162. A new analysis by CardHub.com shows that Americans are on the road to adding $47 billion in credit card debt this year.
With that much debt in plastic, it isn't surprising that some financial gurus, like radio personality Dave Ramsey, recommend cutting up the cards. Dolen and other experts, however, see a different possibility — a way to turn the tables on the banks and credit card companies. It is a dangerous game, a game that if played right could save thousands, but if played wrong could send people to make desperate calls to financial counselors.
Getting into credit card debt because of an unexpected health problems is not uncommon. Will VanderToolen, a financial counselor, sees it all the time. The bulk of calls he gets at AAA Fair Credit, a free financial counseling service based in Salt Lake City, deal with excessive credit card debt. Some of that debt comes from medical bills. Some comes from people who lost their jobs and covered interim expenses with credit cards. Other debt comes from people who are just classic over-spenders.
Zero the hero
Dolen, however, says he was not an over-spender. He considers himself very frugal. It was that frugality which drove him to put his medical bills on that first credit card back in 2003. That card was a new one he qualified for from Bank of America that offered zero percent interest for several months. After that offer expired, he transferred the balance to another card that had a zero interest rate introductory offer. He did the zero percent shuffle multiple times. "I had about a dozen cards," Dolen says. "Before the recession, banks were giving cards to anything with a pulse."
He says there are plenty of ways to use cards strategically and legally, by the banks' rules. But it takes a plan and discipline to pay on a schedule. There is little room for a slip-up.
Many credit cards try to lure new clients with a high initial bonus. There are always strings attached, however. To get the bonus, a person needs to run up a certain amount of purchases within a specified period. For example, one card gave a $500 bonus if people spent $3,000.
"It is one of the best ways to get a lot of free money," says Odysseas Papadimitriou, CEO of CardHub.com, another credit card comparison website. "You use it for a few months and then you get up to $500 of free money. It doesn't get much better than that."
But most people won't keep within those parameters. They'll spend the $3,000 and get the bonus — but then they won't pay the balance off. Or maybe they spend $3,000 on things they don't need. Or they will hold onto the card until the annual fee is due. Human behavior tells the companies that the odds are in their favor.
By strategically using cards with low introductory interest rates and free balance transferring, people may pay off accumulated debt quicker and with less interest. months sooner.
Finance counselor VanderToolen is not a fan of gaming credit cards. "The typical consumer has a difficult time managing their finances as is," he says. "We advise people to just use wise financial management."
But that doesn't mean not using credit cards at all. VanderToolen is a fan of building credit scores by using rewards credit cards and paying them off every month. Rewards credit cards simply, as the name implies, reward customers for using them. Often that reward is in "cash back" percentages for dollars spent.
Dolen also likes regular rewards cards and says he averages about $3,000 back every year from ordinary spending. "It's like free money," he says.
The island approach
The way Papadimitriou recommends using rewards cards is what he calls the "island approach." By this, he means using each card for only certain types of purchases. Different rewards cards have different terms. Some are better, for example, for groceries. Others give more back for gas.
Papadimitriou says that by using different cards, people may earn 6 percent back on groceries, 3 percent on department stores, 5 percent on gas and 2 percent on everything else.
There are catches to be aware of, however. A card may give an initial bonus, but that bonus may best be used to offset annual fees.
"This is not like you go out tomorrow and get three cards," Papadimitriou says. "But over time the goal is to have the best rewards card for each of your major expenses."
All these ways of using cards can go south quickly. "If you have a track record that you do not overextend yourself, then go for it," Papadimitriou says. "If you have the opposite, then don't go for it. It would be like giving alcohol to an alcoholic; it never works out."
Dolen agrees that people need to be very disciplined and that if they find themselves using cards in a self-destructive way they need to avoid using them.
But even using them correctly could be dangerous to financial health.
Mortgaging your future
When people open a new card, their credit score takes a temporary hit. Also, if they only keep cards for a short time and don't have any long-term cards, that reflects poorly on their credit history as well.
"If an individual is going to be purchasing a vehicle with a loan or a home in the next few years, it would be vital to manage their credit properly," VanderToolen says. "It might not show up as a loss to them today, but if they are offered a slightly higher interest rate on a home a year from now even if the interest rate is half a point higher on a mortgage, that will equate to thousands upon thousands of dollars of interest charges over the life of a mortgage loan."
In other words, if people have something major coming up that requires the absolute best credit score, then hold off.
For most people, however, playing with credit cards can be a dangerous game.