Managing Credit Cards

Several times in this blog, I have talked about the advantages and pitfalls of using credit cards. Credit cards offer convenience, purchase protection, and in some cases, valuable rewards points. Credit cards also come with high interest rates and unforgiving fees and penalties when you don't pay on time.

The best way to use credit cards to your advantage is to pay the bill in full, on time, every month. This is called the grace period. Most credit cards have this feature; don't use a card that doesn't.

You can sign up for email reminders so you don't miss a payment, and some banks will allow you to set up automatic transfers of the statement balance from your checking account to the credit card company on the due date. Just be sure you maintain sufficient funds in that bank account so you don't incur a "rejected payment" charge, which will then subject you to interest and late fees.

One pitfall I did not mention is the cash advance. Unlike regular purchases, which do not incur a finance charge if the full statement balance is paid on or before the due date, a cash advance incurs interest immediately, regardless of whether the account is current. Once interest has been applied, you are on "the interest train." Interest will be applied to any new purchases made after that cash advance, and interest will compound daily on the entire balance. Interest will accrue on interest, like a snowball rolling down a hill.

Once you are on the interest train, paying the statement balance in full on the due date will not stop additional interest from accruing. The only way to halt this runaway train is to pay off the entire balance, down to zero. And don't do this by mailing a check. By the time the check arrives and your payment is posted, more interest will have accrued, and your balance will be above zero. And still subject to interest on every charge made. So get online or on the phone and zero out your account as soon as possible after the cash advance is posted—before the end of the billing cycle.

My husband has a VISA card issued by his credit union, which doubles as an ATM card. Occasionally, when traveling overseas, what he thought was an ATM withdrawal from his checking account has been posted to his VISA card as a cash advance. As soon as this type of transaction is discovered, we have to go online and zero out the account to stop the bleeding.

So use credit cards responsibly and reap the benefits of this convenient form of payment. But check your statements promptly and beware of cash advances!

What tips do you have for managing credit cards? I would love to hear your comments.

Sharon Marchisello is the author of Live Cheaply, Be Happy, Grow Wealthy