3 Ways Credit Cards Can Offer You Rewards for Your Loyalty and Not Your Debt.

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Most of my friends have a story to tell about a credit card issuers’ ability to separate them from their money. It was easy for them to get carried away with their credit lines and blame credit cards for capitalizing on fees while they were one late payment away from the poor house. They remember the horror story like it was yesterday.

Their solution was to pay off the enormous balance along with hundreds of dollars of interest owed. Their spending behaviors changed from a hard lesson learned and they began a new life using a debit card. Their reasoning for using a debit card is that it gives them control of their finances.

If you are a credit card user that pays for every purchase and then pays it off since you’ve carried a card you’ll never identify with the “credit cards are evil” mantra that seems to plague public opinion. I’ve cashed in points for airfare for decades. However, because I see so many friends detailing bad experiences with credit cards, I decided to do some investigating.

I found that those that share their horror stories are often people who feel they’ve been sucked into credit card companies’ business models of deception, seducing customers into paying high interest rates and late fees.

Credit card companies are out to make money, there’s no doubt about that. While interest rates and late fees are great revenue sources for credit card companies, that is not the only way credit cards make money. Credit card companies also earn revenue from merchants and annual fees.

If you use your credit card like a debit card and pay off your balances every month, you will not be paying any high interest rates or late fees but you will be getting rewarded for your fiscal responsibility. You’ll also be building your credit rating, have fraud protection, and be rewarded with points, miles or cash back.

I can’t stress it enough. Pay off your balances in full every month. Treat your credit card exactly like a debit card. Only use it for purchases within your means, and choose a card that rewards you back. If you treat it as a valuable rewards tool, you’ll earn rewards worth thousands of dollars a year.

There is a lot of competition in the credit card market, and dozens of credit card companies more than willing to offer huge incentives to carry their cards. You can easily put a plan in place that allows you to be the winner in this game.

The ways that credit card companies make money.

  1. Merchant Fees

Ways they make money: When consumers pay for something using a credit card, they often assume that the retailer receives the entire payment. However, a small percentage of most credit card purchases, about 2%, gets gobbled up in credit card interchange fees. The bulk of that goes to the bank that issued the card used while a portion also goes to the credit card association managing the account, such as Visa or MasterCard. These companies also charge their partner banks fees for their services, further adding to their revenue.

What this means for you: Interchange fees don’t impact consumers as much as they do merchants, who receive only $97-$98 of a $100 credit card purchase. Both large and small businesses want to be able to accept credit cards to make it easier for their customers to make a purchase. It’s just the cost of doing business.

As a consumer, of course, it means you don’t have to carry cash or a checkbook to make purchases. You can use a debit card and the merchant will pay slightly less making just a little more money but know you won’t get rewards that are easily earned from daily trips to the store.

What you can do about it: If you really want your local grocery store to receive 100% of your purchase, then pay cash. To off-set merchant fees, some retailers add a 2%-3% surcharge. Merchants are required to disclose any credit card surcharges upfront and detail that extra fee on your receipt.

Watch out though. Utility companies or government agencies such as the DMV will often add a surcharge if you use a credit card to pay for a service. Try to avoid using a card anywhere that adds this charge. Using cash will save you money in these cases.

  1. Consumer Fees

Ways to make money: While merchant fees make up a good portion of credit card companies’ revenue streams, they also collect fees from their cardholders — including annual fees, cash advance fees, balance transfer fees, and late fees.

What this means for you: Consumers who haven’t read the fine print are often shocked to discover the number of fees companies charge. Not only will they drive up your credit card bill, but incurring certain fees, like late fees, will damage your credit score, too. Keep in mind that fees can vary by card and issuer, so just because one company or one card doesn’t charge an annual fee, for example, that doesn’t mean another won’t.

What you can do about it: Make sure to find out whether there’s a fee and how much it is before you apply for a new card. In some cases, like with the Chase Slate credit card, you can transfer your balance, and you won’t pay the Balance Transfer Fee. With the rewards program credit cards, the expense of a balance transfer do outweigh the benefits.

Balance Transfer Fee: If you move your higher rate balance on one or more card(s) to another with a lower interest rate, most companies will charge you a 3% balance transfer fee on your transaction — so if you want to transfer $7,500, you’ll have to pay $225 upfront.

Cash Advance Fee: Credit cards often come with a cash advance benefit that might seem like the answer to your short-term money problems, but you could be paying that off for years. Talk to your credit card company about the charges, and look for alternative solutions that won’t cause you to have more credit card debt than savings. Or look at taking out a personal loan that offer lower interest rates and a fixed payment plan for 3 or 5 years.

Foreign Transaction Fee: If you plan to use a credit card while traveling overseas, research different companies’ foreign transaction fees. These can seriously increase your travel expenses if you’re not careful, so look for cards with no fees on international purchases. Most of these products are travel earning cards and do charge an annual fee but worth paying for the additional benefits you will enjoy.

Annual Fee: Annual fees aren’t fun to pay, but they aren’t the enemy, either; some of the best rewards credit cards charge annual fees. Personally, I have four personal credit cards that I use for specific purchases and four credit cards for my small business. When I’m deciding to open any new card, I ask myself, “Does this offer a good return on investment?” A great rewards card is worth the annual fee if you find the earned rewards valuable or the benefits and services are being used enough.

  1. Interest

 Ways to make money: Interest payments undoubtedly provide credit card companies with revenue — especially off of missed payments. Consumers who fall two months behind on their credit card payments face an average penalty interest rate of 28.60%.

So let’s say you carry a $6,000 balance on your card charging 11.98% paying $200 minimum payment you would pay $626 in interest in 12 months. At the 28% penalty APR, you would pay $1,590 in interest – that’s close to $1,000 extra in interest per year.

What this means for you: Because just a few missed payments can quickly spiral into serious debt, consumers often mistakenly assume that credit card companies want them to get in too deep. After all, that means more profits for the creditors, right?

In truth, while credit card companies do profit from the interest that accrues on overdue accounts, they don’t design their systems to trick customers. The more spending power cardholders have, the more money these businesses make, whether they carry high-interest balances or not. That’s why they provide cardholders with the options to set up automatic monthly payments and send out reminder notices ahead of their due dates.

What you can do about it: Set your account to send reminder alerts via text or email before your bill is due each month, and always pay your balance in full. And while credit card companies make it easy to pay, they can’t stop you from buying things you don’t need or can’t pay off. So every time you’re about to charge something to your credit card, ask yourself, “Can I pay this off on my next bill?”

Here’s the hard truth: If the answer is “no,” wait until you’re in a more comfortable financial position. Even a small purchase can quickly become a burden when you account for the interest over time. And paying the monthly minimums won’t help you once you’ve racked up enough interest on the debt. You also want to avoid maxing out your cards, because carrying high balances lowers your credit score.

 The Bottom Line

I can’t stress enough that you should never make payments late. This is a careless consumer mistake that creditors make money off of, because they will charge late fees that can really add up on your total bill. It can also trigger an unwanted increase in your interest.

 Treat your credit cards like the finite amount of cash you carry in your wallet. In doing so, you won’t get sucked into the trap of buying more than you need — or can afford. When used responsibly, credit cards offer numerous benefits including free travel, cash back, and discounts for you and your family.

Ready to introduce a credit card into your wallet? We love the Barclaycard Arrival PlusTM World Elite MasterCard® . The Barclaycard Arrival PlusTM World Elite MasterCard® waives the annual fee the first year and is only $89 the second year. So, if you’re ready to trust yourself and want a credit card that offers you flexibility in redemption, and a good earnings value consider the Barclaycard Arrival PlusTM World Elite MasterCard®, even if don’t have travel plans in the near future. This is a card that allows you a cash back option as well. If you do find you made a purchase that was more than you can pay off in one month, know your miles can be used as cash back on your billing statement and help pay down the balance.

Do you have a credit card story that you would like to share? Please comment below. We would love to hear from you.

Barclaycard Arrival Plus® World Elite Mastercard®

  • Enjoy 40,000 bonus miles after you spend $3,000 on purchases in the first 90 days – that’s enough to redeem for a $400 travel statement credit toward an eligible travel purchase.
  • Earn 2X miles on all purchases
  • Get 5% miles back to use toward your next redemption, every time you redeem
  • Miles don’t expire as long as your account is open, active and in good standing
  • No foreign transaction fees on purchases made while traveling abroad
  • 0% introductory APR for 12 months on Balance Transfers made within 45 days of account opening. After that, a variable APR will apply, 16.99%, 20.99% or 23.99%, based on your creditworthiness. There is a fee for balance transfers.

40,000 miles

Balance Transfer
0% Intro APR for 12 months

Ongoing APR
16.99%, 20.99%, or 23.99% variable

Annual Fee
$0 first year; then $89

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Editorial Note: Opinions expressed here are author's alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.