You may not be aware of it, but bankers and financial experts classify credit card users into two types: Revolvers and Transacters. However, in this area, credit card companies look at their customers differently. The truth is, they classify their credit card customers into three distinct types. They are:
1. The Revolver
Believe it or not, the credit card companies love this type of customer. In fact, if you fall under this type, you bet your credit card issuer would like to keep you as a customer for as long as they can. Why do they love Revolvers? It’s quite simple. These customers provide the revenues for the card companies – you might say they keep the issuers in business.
The Revolver is the type of customer who does not pay off his balance in full at the end of each month so that he allows the interest to build upon the unpaid balances.
Over time, the balance will increase in total and the cardholder eventually has to pay it. You can find Revolvers all over the country. This diversity ranges from minimum wage earners to businessmen to high-powered financiers.
It doesn’t matter whether you’re the kind of card user who buys a high-priced item on a small-time budget or an online businessman who uses your card to purchase your inventory when there’s a sale. If you carry a balance from month-to-month or if you only pay the minimum (or slightly over the minimum), you’re still a Revolver.
We’re not saying it’s necessarily bad to be a Revolver. We just like to point out that revolvers ultimately end up paying more for the things they buy than most people do because of the additional interest on the credit.
2. The Card Hacker
Let’s get this straight: we do not refer to a con artist, identity thief or malicious computer prankster when we say card hacker.
The card hacker is the creative cardholder who try to outsmart the card companies by taking advantage of their offers to the hilt.
One way is by opening two cards at once. The first one will be with big bonuses, double rewards in key categories but very high APR. The second card will be a bare-bones reward card or one that offers zero-interest balance transfer cards that has no interest for the first 12 months.
Once the two cards are ready, the Hacker will use the big rewards card to purchase merchandise worth a few thousand dollars they have already budgeted. It could be a state-of-the-art jacuzzi or a European holiday for the family. Then, they quickly transfer this charge over to the card with the low rates on balance transfers. Now, you can see how it will playout for the Hacker. He ends up with a huge stack of rewards from the first card, he’s able to buy the big-ticket item he wants, and he now has a full year to pay it off interest-free.
Does this sound easy, exciting and perfectly legit? Yes, but remember that it has its own risks. Before you attempt credit card hacking, remember that some cards will charge you a balance transfer fee for the privilege. If the fee is higher than the value of the rewards you got, you might end up losing money in the end.
3. The Deadbeat
Deadbeat here does not mean a person who doesn’t pay his debt. In the credit card realm, they are quite the opposite. A Deadbeat is actually a very responsible credit cardholder who has a lot of positive financial sense. However, credit card companies don’t make much money from Deadbeats so they don’t like them and they call them with a negative name.
Deadbeats practice a simple financial stewardship rule that benefits cardholders but leaves credit card companies frowning.
This is the practice of paying the credit card bills in full every month.
As far as they can help it, staunch Deadbeats will never pay a single cent in interest to keep their credit cost as rock-bottom as financially possible. Deadbeat is a cousin to the easy-going Transacter. Transacters usually pay their balances in full and on time but once in a while, they allow a small amount of balance to remain from month-to-month.
Deadbeats are financially responsible people – they control their spending only on how much they can afford.
Bargains, sales, and special promotions don’t appeal to them so much. You may be a Deadbeat and you’ve noticed that you are not too popular among your family and friends because of your self-control. Don’t let that affect you because ultimately when these people realize they are paying a lot more than you are, you will have the last laugh.
Why Companies Consider “Credit Card Deadbeat”?
The lifeblood of credit card companies is the money they collect from cardholders in the form of interest, fees, and other charges. Any time you let your balance revolve by carrying it from one month to the next, you will have to pay interest and finance charge for the amount. Credit card companies love this kind of transaction because they bring real income and profits to the company.
When you settle your balance in full each month, the card company does not collect interest, so they don’t make so much money off it.
Of course, they earn from merchant fees they collect from the stores whenever you use your card but that is minimal. That being said, you don’t bring in great business to the credit card company, so they label you as Deadbeat.
Be a Credit Card Deadbeat
You can be a Deadbeat (or a Transacter) and save thousands of dollars in interest by following these tips:
Don’t Carry a Balance
By simply paying off your credit card balance every month (or even twice a month), you can avoid paying interest charges. Some people pay the balance every time they get their paychecks.
If your employer pays you every week and you immediately pay your balance when you get your weekly pay, that is a good discipline that will reap rewards. You will never be late, improve your credit, never pay interest, and have easily manageable debt.
One good technique to make sure you never carry a balance on your credit card is to have a solid budget and stick to it. Here are 2 important things to remember when making your budget. They are:
Have a Saving Plan
Set aside some amount for things like a car breakdown, emergency home repairs, and sudden out-of-pocket medical expenses because these things can demolish your budget.
Make a budget for things you have a weakness for
You might believe that buying frivolous stuff is not a good financial stewardship practice. But some of us pursue a hobby of sorts (although others may call it a weakness) like buying the latest sunglasses, collecting comics, or pampering your pets.
There must be a provision for these items in your budget because you will torture yourself when you can’t spend them because you have no funds.
Pay on Time
Credit card companies have a reputation for charging cardholders left and right fees such as interest charges and late payment penalties. So, to avoid paying them, pay your balance on time.
As we’ve said before, paying your balance every time you have the resources to do so should prevent any stiff late payment penalty and damage to your credit score.
Work on Your a Credit History
Perhaps the simplest way to build a credit history is through credit cards. If you are still in college, don’t worry because a lot of card companies have credit card products that college students can easily qualify for.
If you are getting a credit card because you want to build a credit history, then build a good one.
One way is to pay your bill in full every month. Over time, consistently doing it will result in a good credit score. Of course, managing your credit card responsibly is not the only way to build a good credit history.
Whether you have a mortgage, or an auto loan, or a personal loan from a bank, lenders will report your payments to the credit bureaus and that will build your credit . Even your gym membership can find its ways to your personal credit history to the credit bureaus.
So, if you are late in your payment of the membership fee, you can hurt your credit score over such a small thing. Students or recent graduates are highly unlikely to have their own mortgage or car loans, so credit cards would be the easiest route for them to build their credit history. The other benefit of paying your card in full is that you also don’t pay interest. That is totally different from a mortgage where the lenders will charge you interest every month.
Have 2-3 Cards, Maximum
Normally, an average person can comfortably live with one or two cards. If you are just establishing credit, we suggest that you just get one card. You may opt for a secured credit card which banks will give if you have a corresponding deposit account with them. If you have a secured credit card, you offer your deposit as security up to the amount of your credit limit for as long as you use the card.
When you choose a credit card, look for one that can give your rewards but does not charge an annual fee. If you have no choice but to get one with an annual fee, just make sure that the rewards outpace the fee.
If you get more than two credit cards, you will have a harder time tracking and managing all of them.
Calculate Your Credit Utilization Ratio
You need to mind your credit utilization ratio. This is the proportion of your balance at the close of your billing cycle in relation to your total credit limit. According to Experian, you should try to keep your credit utilization rate at 30% or below.
You might damage your credit score if you go beyond that threshold. Credit scoring models would interpret a high credit utilization rate as a sign of possible overspending and irresponsible money management. Therefore, it is riskier.
Know The T&C of Your Credit Card
Yes, we know that the fine prints on your agreement are long, boring and wordy but you should read it anyway. Don’t rush but read through it. Understand the many provisions such as grace periods, late payments, interest rate, and interest escalation clause in case of late payment.
Would you have to pay additional fees if you spend over your limit? Is the interest rate differente for a cash advance? Can you request for a waiver of the membership fee?
Credit cards can be helpful, useful and safe for managing your finances if you handle them well. They can help you consolidate regular multiple bills into one payment. You can link many recurring payments on your credit cards such as your mobile phone bill, your various monthly subscriptions, and even your charitable donations. Most credit card issuers will let you pay online and many will also let you arrange for your payment to automatically come from your deposit account.
Disciplining yourself to be an intelligent consumer and knowing how to manage your credit card correctly will make you a Deadbeat. Yes, the credit card company might dislike you, but we’re pretty sure your wallet will love you.