Gaming the System: How to Make Credit Cards Work for You


Every day, Americans are hit over the head with how different the current generation is from its baby boomer parents and grandparents, the Great Depression generation. Technology is often the realm where this difference is most palpable, but at a time when fiscal responsibility at a corporate and government level is firmly in the national spotlight, comparing generations in terms of debt burden may be a more relevant analysis in terms of the economic future for the current generation of Americans.

A study published at the beginning of January in the journal Economic Inquiry showed that American credit card holders in their late 20s and early 30s have more debt than older consumers, pay back their debt more slowly, and risk dying in debt. Americans born between 1980 and 1984 have on average $5,689 more debt than their parents had at the same age and $8,156 more than their grandparents.

“Credit is more readily available now, and there have been changes in interest rates and less stigma attached to having credit card debt, which may all make younger people today more willing to go into debt,” Ohio State University economics professor Lucia Dunn, a co-author of the study, told Reuters.

It has been argued that the problem is credit card companies like Visa (NYSE:V) or Mastercard (NYSE:MA), which benefit from higher balances and the correspondingly greater interest rate charges. In fact, the Credit CARD Act — or Credit Cardholder’s Bill of Rights, as it is often called — was signed into law in May 2009 by President Barack Obama and took effect in February 2010 as the federal government’s answer to that concern. The law was designed to make credit cards more fair by prohibiting certain practices like allowing a consumer to go over limit and then imposing an over limit fee, as well as making their rates and fees more transparent.

However, it can also be argued that the real problem with credit cards is cardholders. That is the claim Time made in 2009, when the Credit CARD Act was making its way to Obama’s desk. “Every penny of Americans’ nearly $1 trillion in revolving debt started with someone – some individual person — whipping out a piece of plastic and making a decision to use it,” wrote Time’s Barbara Kiviat in her piece titled “The Real Problem with Credit Cards: The Cardholders.”

This insight has repercussions for how the problem of credit card debt should be addressed. While the Credit CARD Act took aim at some of the systemic problems, Time’s analysis suggests that problems on the other side of the card need to be examined as well.

“There are piles of evidence that people are bad decision makers when it comes to how they use credit cards,” noted Kiviat. As her research showed, certain economists believe that the issue at hand is more than a simple case of human carelessness: as a species, humans have a hard time understanding future costs, they postulated. “Instead, we assign a disproportionate amount of importance to what’s immediate and tangible,” she explained.

As this assessment indicates, a realignment of thinking could do much to help lower credit card debt, or at least help cardholders look at how to use credit cards differently. After all, there is a way to game the credit card system.

There is some evidence that a realignment of thinking of among members of Generation Y, who came into adulthood in the midst of the financial crisis and the resulting fallout, has taken place. Reuters reported in 2010 that 18- to 30-year-olds were taking a much more conservative approach to managing their money. “They witnessed the dot-com implosion of 2000 and the more recent onslaught of plunging housing prices, the credit crisis, recession, double-digit unemployment and an annihilation of investor wealth,” noted the publication. Therefore, “Generation Y’s views on money echo that of another generation — their grandparents.” As Ulrike Malmandier, a professor of finance at the University of California, Berkeley told Reuters, “depression babies” carry the memory of volatile times for their entire lives.

Still, with the economic problems that wracked the country following the crisis, some measure of debt was unavoidable, as studies have shown. But that is not to say that credit cards cannot play a needed function in building up a solid credit history.

Cut Credit Cards New Feature 300x270It may seem that consumers are at a disadvantage when it comes to credit cards, but it is also true that credit card companies are competing for customers’ business just as companies in any other market do. The primary way that credit card companies compete is through rewards programs, which allow cardholders to accumulate points that can be redeemed for cash, airlines miles, or benefits like priority boarding and a free checked back from airline-sponsored credit cards. Some cards even allow points to be used to pay taxes, deposited into IRA accounts, or go toward paying down a mortgage.

Because of this competition, it’s as if credit card companies are paying cardholders to use their products — provided the user pays off the balance before it becomes due. As Ken Paterson, the director of credit advisory service at Mercator Advisory Group, told, the cash-back rewards programs can be complex, making good spending habits a necessity. Those types of cards typically charge higher interest rates than other cards, making them more expensive if the balance is not paid on time.

And, as Paterson noted, “read the offer’s fine print.” Some reward programs can be capped or have expiration dates, or credit card companies can change their policies without notice.

Credit cards may be one of the most divisive of all the available financial tools, but since a credit card is just that, a tool, whether it is an effective one depends on how cardholders choose to use the tool. There is a lot more to using credit cards successfully than simply keeping your personal information safe, so here are six suggestions to make credit cards work for you:

(1) Limit the Number of Cards You Have: “A wallet stuffed with credit cards can make financial institutions nervous that your spending could get out of hand,” states Bank of America’s explanation of five common misconceptions about credit card use. While that is undoubtedly true, “making financial institutions nervous” is more of a concern for an individual’s credit score. What is more important about that statement is that it indicates that the more cards a person has, the more likely spending can get out of hand. According to, the average cardholder has seven credit cards and two debit cards. As Bill Hardekopf, chief executive officer of, a Website that helps consumers compare credit cards, told the Seattle Times, the number of credit cards an individual owns has an affect on their overall financial situation. “There is the temptation of using them and charging more and more,” he said. “Why tempt yourself with that situation?”

(2) Don’t Get in the Habit of Making Minimum Only Payments: By using a credit card, the cardholder is offering the bank’s money, instead of their own, to pay for a good or service, which will be repaid at a later date. Since the bank is providing the cardholder a service, it is in the repayments of the debt that banks usually make their own profits. Credit cards create significant profit sources for banks when individuals go beyond their credit card limit or keep high balances on their cards.

Making minimum-only payments leads to high balances. They also increase the time it will take to pay off the debt because such payments increase the amount of interest the cardholder ends up paying.

(3) Don’t use your credit card to purchase items you can’t afford: The bank does not check your savings account before your purchase is approved, and it has little incentive to do so.

This recommendation also means cardholders should keep an eye on their available credit limit. Even if a particular transaction would put you above your credit limit — the amount the bank determines you can buy at anyone time — the bank will likely approve the transaction just so an overlimit fee can be charged. This practice enables people to spend more money with credit cards then they would have otherwise, which, in turn, creates more profit for banks.

When you cannot afford to pay for a purchase in cash that is arguably the time when you should not use a credit card. Additionally, using cards for everyday purchases, as a substitute for cash,  is a habit that can quickly led to debt. Studies have shown that people are more likely to make a purchase if they intend to pay for the item or service with a credit card than with cash. After all, cash does seem much more scarce; credit credits just do not convey a similar feeling.

(4) Know the Different Type of Credit Cards: Credit Cards may all seem fairly similar in basic concept, but variations in their terms and conditions are definitely not. The differences in credit card features —  interest rates, annual fees, and credit limit — should influence which card you choose and how you use it. There are standard credit cards, known as “plain-vanilla” cards, that enable cardholders to spend up to a certain credit limit and apply a finance charge to outstanding balances at the end of each billing cycle. But even here, finance charges can vary, the annual percentage rate — or the interest rate applied to a balance carried beyond the grace period — can increase, and APRs can be fixed or variable as well.

(5) Build Good Credit: With that being said, if cardholders control their spending and pay off the balance monthly, it may seem that the only reason to use credit cards is to temporarily avoid the inevitable: paying bills. But when credit is truly needed — when you are buying a automobile or property — such credit card use will stand you in good stead. Therefore, it is important to use credit cards with a particular strategy in mind, whether it is to build credit or get rewards.

When building credit, it is important to just have one card, keep a low credit limit, and pay off he full balance each month.

(6) Get Rewards: As mentioned earlier, reward points were created as a marketing tool that would convince more people to sign up and cardholders to make more transactions. With such a card, cardholders are awarded points, or cash back, based on the amount of money spent. Reward cards can be tricky, points may expire or reduced as the result late payments, but in a sense, they are the banks way of paying you to use their card. For example, an airlines-branded credit card can help cardholders save money on travel fees and airfare, and the same goes for gas rewards.

However, it is important to remember that these benefits are only truly realized when spending is kept in check and balances are paid off.

Honorable Mention: Don’t use your credit card when you are intoxicated or hungry.

Follow Meghan on Twitter @MFoley_WSCS

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