Beat the Banks at Their Own Game


Managing your credit is one of the most important keys to financial success. Good credit can make or break some landmark moments in your life, such as buying your first home or getting financing for college tuition.

But by now, any illusions you may have had that banks and other lending institutions are somehow on your side should be gone forever. With Bank of America (NYS: BAC) , Citigroup (NYS: C) , and Wells Fargo (NYS: WFC) among the big banks that agreed to pay more than $25 billion to settle a dispute about alleged foreclosure abuse, you hardly need any further evidence that when it comes to getting credit, you have to be on your guard at all times.

Make the most of your plastic
One key battleground where banks and consumers wage war is with credit and debit cards. Over the years, the changing trends in plastic have closely followed profit opportunities for the banks that issue them. Consider:

  • Credit cards allowed banks to earn fees from the merchants who accept card payments as well as lucrative interest charges from cardholders. For years, that win-win scenario was enough for banks to earn hefty profits, even with grace periods that allowed those who paid their balances in full every month to escape finance charges and get free float on their money.

  • To get rid of the float problem, banks started pushing debit cards as an alternative to credit cards. Debit cards allowed issuers to earn similar fees from merchants while eliminating all of the credit risk associated with credit cards, as they could immediately tap cardholders' bank accounts for payment.

  • But recently, as new laws have clamped down on debit card fees, banks are moving back toward credit cards -- and they're pushing big rewards as incentives to get cardholders to switch.

If you play your cards right, you can reap a lot of benefits. But you still have to be careful.

Are rewards worth it?
Debit card rewards have largely become a thing of the past, but credit card rewards are on the upswing. As SmartMoney described in an article on credit cards, lucrative benefits like extended 0% interest periods, no-fee balance transfers, and big upfront cash-back and rewards points bonuses have become more common recently. For instance, recent data show that more than 80% of card offers include 0% teasers on purchases. At the same time, American Express (NYS: AXP) recently offered some prospective customers 100,000 points to take its platinum card -- redeemable for up to $1,200 in travel or $1,000 cash. Citigroup and JPMorgan Chase (NYS: JPM) have made similar offers to select customers.

If you invest in these card issuers, don't fear for their prospects. The reason these issuers are willing to pay so much for your business is that they expect to make it back over time. With a combination of sizable annual fees, merchant-related income, and the potential for interest payments if you overextend yourself, card issuers can turn even highly rewarding cards into profits. Meanwhile, perks like 0% interest don't really cost issuers that much -- especially when most of those banks are paying their deposit customers little more than that on checking and savings accounts.

In order to turn the tables on the banks, you have to be ruthless -- and willing to take small dings on your credit report. Closing out newly acquired cards after you earn rewards but before you have to pay hefty annual fees or other charges can give you a reputation for switching cards frequently, which in turn can cost you a few points on your credit score. You have to decide what your credit is worth, and whether the rewards you earn are worth the cost.

It's your money
One thing is certain: Banks want to earn profits, and they're not giving you any incentives to sign up for new products because they want to do you a favor. But if you're opportunistic about making the most of your credit, you can get some valuable rewards and beat the banks at their own game.

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At the time thisarticle was published Fool contributor Dan Caplinger has entirely too much fun using free card rewards. He doesn't own shares of the companies mentioned in this article, but he does have credit cards from Chase and B of A. The Motley Fool owns shares of Bank of America, Citigroup, Wells Fargo, and JPMorgan Chase, and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo and writing a covered strangle position in American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy gives you all the credit you need.

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