Sunday, August 26, 2012

Variable Rate Credit Cards - Good or Bad?

If you've been reading our blog, then you know that I am not a big fan of credit cards. Credit cards are very convenient and they are mandatory when doing certain things such as securing a rental car or for buying airline tickets. Shopping online is also another area where a credit card is a must. I would also take a moment to discourage anyone from using a debit card (linked to your checking account) to purchase items online, especially if you do not know the vendor. It's very difficult in some cases to get your money back and as you know, the money disappears right away from your bank account. OK, with that out of the way, let's talk about today's topic, the variable rate credit card.

Now why would we want a credit card whose rate goes up and down? Well, the idea behind this is that you would get hooked by a low teaser rate and then be presented with a prime + some number as the rate you would eventually pay. Now the only time that this would be a good idea is at times when the economy is depressed and interest rates are low. Hey, wait a second, isn't that now? Yes, it certainly is! With the prime rate now in the low single digits (currently 3.25%), it's a good time to have a credit card that is a variable rate a few points over the prime rate!

Credit card companies are getting money at a super low rate now from the Fed. If you have one of those 27.99% APR credit cards, and if you have good credit, now's the time to take action.

In the case where you already have a credit card with a balance, you can save a pile of money by calling your credit issuer's customer service line. Explain to them that you've been a good customer and that you want your interest rate lowered. Be firm, but polite. If you don't get the answer that you are looking for, keep going up the chain of command. These people are working in datacenters off a script and will do everything they can to let you know that they cannot help you. Some will repeatedly insist that nobody's available, but wear them down and keep at it. Sometimes you will have to hang up on a stubborn representative. Sometimes you will have to ask for the department that closes the account before they'll do something.

Either way, companies know that rates are low and they have absolutely no justification for charging you big interest fees. The best way to avoid these fees is to always pay off your balance each and every month. I advise all of my friends and family to avoid using credit cards at all except where no alternative is available. Keep in mind that easy credit is a lure to make you spend money that you don't have. Do not succumb to the temptation of an impulse buy. When shopping, take along a list of essentials and only carry cash. That will save you from the dreaded credit card trap.

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