How to ‘Fight for Your Money’

How to fight for your money
The fact is that when they’re used responsibly, credit cards are a good deal. They free you from having to pay for everything in cash, which can be a huge convenience. They also allow you to borrow money interest-free — if you pay your bill before the grace period ends. But let’s be honest. Most people don’t do this.

To be smart with your credit cards, here is what you need to know — and do.

Pick the right card for you
There are literally thousands of different credit cards to choose from these days: low-interest cards, rewards cards, balance-transfer cards, airline cards, student cards, prepaid cards, business cards, cash-back cards — the list goes on and on. Are you an Oakland Raiders fan? You can have an Oakland Raiders credit card. Do you love country music? You can get a Reba McEntire or Alan Jackson card. You can even get one from World Championship Wrestling with Hulk Hogan’s picture on it.

But is that the right card for you? How much is the annual fee? What’s the interest rate? Who issued the credit card? What happens if you are late paying? How much is the penalty? Does the contract include the dreaded Universal Default Clause? (More about this later.)

Some cards provide cardholders with elaborate concierge services, but they charge annual membership fees in the hundreds — and sometimes thousands — of dollars. Are these services worth that much to you? Other cards have no annual fee if you pay your balance in full every month. Are you going to carry a balance? If so, then you need a card with the lowest possible interest rate.

There are two easy ways to get a good sense of what’s out there for you to choose from. First, simply hang on to all the junk mail you get this month. I promise you — there will be a dozen credit card offers in the pile, maybe more. Simply spread them out on your kitchen table, side by side, and compare them.

The other way is to go online. Web sites like Bankrate.com, cardratings.com, creditcards.com, lowcards.com, and lowermybills.com all offer excellent comparisons of interest rates and card features. Also, the Federal Reserve Board surveys credit card plans every six months and publishes an interactive report that makes it easy to make comparisons. You can find it online at www.federalreserve.gov/Pubs/shop/survey.htm.

Read the fine print
I did a public television special a few years ago where I blew up a credit card agreement and pointed out all the legal tricks the credit card companies like to play. I had to blow it up because the fine print was so small. But these agreements are not simply hard to read. They are also hard to understand. All the same, you need to read them and do your best to understand what they say. At the very least, study the disclosure box that spells out the agreement’s basic terms. These include:

• The annual percentage rates (APRs) you’ll be charged if you carry over a balance, transfer a balance, or get a cash advance.
• The minimum payment required and how long you can take to pay your bill in full before you get hit with a finance charge (known as the grace period).
• The method used to calculate your outstanding balance if you don’t pay in full.
• Your credit limit and whether they can change it without notifying you.
• What the penalty fee is if you exceed your credit limit.
• The annual fee, if any.
• When your payment is due — and when it is considered late.
• What the penalty fee is for late payments, and whether paying late will trigger an increase in your interest rate.
• Whether the agreement includes a universal default clause (which allows the credit card company to penalize you with fees or an interest rate hike if you are late paying some other company’s bill).

Using a credit card without knowing the terms of your account is simply dangerous. It can cost you hundreds if not thousands of dollars a year. To make sure you’re not ripped off, you have to pay attention — you have to FIGHT.

Ask for a lower rate
Just because a credit card company sticks you with a high interest rate doesn’t mean you have to accept it. This is especially true if you have decent credit, a record of paying on time, and haven’t maxed out your card.

Here’s what you do. First make sure you know the rate you’re currently paying and the kind of rates other banks are offering. (You can do this by checking your latest credit card statement and then going online to a site like Bankrate.com that posts comprehensive lists of what kind of interest virtually every credit card company in the country is charging.) Then find the “Customer Service” phone number on your statement, call your credit card company, and ask to speak with a supervisor. Don’t try to negotiate a lower rate with the first person who answers the phone. The people who answer the phones generally don’t have the authority to approve changes, so you’d just be wasting your time.

When you are connected to the supervisor, tell him or her that a competing bank is offering you a much lower interest rate than the one you’re currently paying — and that unless he can match or beat the competitor’s rate, you intend to transfer your balance to that competitor. Don’t be vague: Tell the supervisor the name of the competing bank and the actual interest rate it is offering. Chances are that the supervisor will agree to lower your rate on the spot. This is particularly likely if your interest rate is, say, 25% and the average on cards at the time of your call is 12%. According to the Wall Street Journal, more than 75% of the people who call their credit card companies to ask for a lower rate are successful on the first call. If you are not that fortunate, don’t give up. Just call back and speak to someone else.

Be aware that there are often many levels of supervisors. The departments that handle these calls have on average two to five levels of management. So if the supervisor you get the first time around doesn’t give you what you want, ask to speak to that supervisor’s manager. And if you don’t like what he or she tells you, ask to speak to his or her superior.

One other thing: Make sure you write down the names of everyone you talk to. If you’re told company policy forbids giving out last names, ask for an identification number. Not only will this enable you to keep track of all the different supervisors and managers you’re bound to wind up dealing with, it will also make the customer-service people wary of offending you. Generally speaking, as long as you are polite and reasonable, they will probably try their best to satisfy your request because ultimately they want to keep your business.

If they won’t negotiate, ask to have the account closed
If they won’t work with you, tell them you want to close your account. Often this will lead the person who took your call to transfer you to a new department — one whose job is to talk customers like you out of canceling their cards. They will likely ask you why are you closing your account — at which point you can explain that it’s because of the high interest rate you’re being charged: Their refusal to lower it gives you no choice but to transfer your balance to a competitor.

Time and time again, this “close my account” approach gets cardholders a lower interest rate. (If it doesn’t work, then you should transfer your balance to a competitor with better rates.)

Once your interest rate has been lowered, keep in mind that there’s nothing preventing you from calling back and asking them to lower it AGAIN. In fact, I recommend you put a reminder in your calendar to call the credit card company 90 days after you get your rate lowered to see if they will lower it again. Often, they will — especially if you have paid your bills on time.

And don’t give up. I have been in situations where it took as many as nine calls to get a rate lowered. Believe me — it’s worth the effort. In total, those nine calls took a total of maybe two hours spread over a few weeks — and they resulted in thousands of dollars in lower interest payments in the first year alone.

Don’t mix purchases, balance transfers, and cash advances
If you carry over balances and use your card for a variety of different kinds of transactions — that is, purchases and cash advances and balance transfers — chances are you will be charged a variety of different interest rates. Usually, the rate for balance transfers is the lowest, with the purchase rate in the middle and the cash-advance rate up in the stratosphere somewhere. Common sense will tell you that you should try first to pay off the portion of the balance with the highest interest rate. Common sense is correct, but as we’ve seen, the banks don’t like it when consumers act sensibly. So they make it difficult if not impossible to do this.

Say you’re carrying a total balance on your card of $5,000. Of that, $1,500 is for purchases, for which the interest rate is 11.9%; $1,000 is for cash advances, which have a painful 19.99% rate; and the remaining $2,500 is the result of a balance transfer, which you made because they offered you a special promotional rate of just 4.99%. Now, if you could afford to send the company only $1,000, you would probably want it to be applied to that high interest cash advance.

Unfortunately, that’s not what the bank will do. Generally speaking, when you make a partial payment on a balance with several different interest rates, the bank will first apply your payment not to the portion with the highest rate but to the portion with the lowest rate — in this case, the $2,500 you owe for the balance transfer. Once that’s been paid off, they’ll start applying payments to the balance with next-highest interest rate — your purchase balance. And only then, after that’s been paid off, will they start letting you get rid of the high-interest cash-advance balance. This is very good for them and very bad for you.

The Federal Reserve has proposed a rule that would bar this practice, and by the time you read this, it may have been adopted. If it hasn’t been, there are only two things you can do to protect your money. Either pay off your balance in full or, if this is impossible, adopt a policy of using separate credit cards for purchases, cash advances, and balance transfers. That way you — and not the bank — can decide how your monthly payment should be allocated.

Opt out of preapproved solicitations
Credit card companies send out about 6 billion such solicitations a year. The most dangerous of these are the preapproved or prescreened offers, where card issuers have checked out your credit history in advance. Not only do they pose a dangerous temptation, but if they fall into the wrong hands, they can expose you to the risk of identity theft. Fortunately, there is an easy way to stop the credit card companies from sending you these sorts of offers. The major credit-reporting companies have a service called OptOutPrescreen, which allows you to opt out of receiving offers of credit or insurance that you didn’t ask for. You can do so permanently or just for five years. For details, call them toll-free at 888-5-OPTOUT (888-567-8688) or visit them online at www.optoutprescreen.com.

Excerpted from “Fight for Your Money” by David Bach © 2009 David Bach. Reprinted by permission of Broadway Books, an imprint of the Crown Publishing Group of Random House, Inc.