Want to avoid a similar fate? It’s all about knowing how to shop for a mortgage.

Banks and Credit Union Loan Officers

The simplest way to apply for a mortgage is to walk into your local bank or credit union and sit down with a loan officer. He or she will take your application and, hopefully, present a number of different loan options for your situation. Depending on the bank, you may get a really good deal, especially if you’re already a loyal customer.

Small local banks and credit unions often offer the best mortgage rates. Trouble is, many of them only lend to people with truly immaculate credit. This alone can rule-out many first-time buyers who simply don’t have long enough credit histories yet.

But let’s assume your bank offers you a loan. Unless the rate the bank offers is lower than national averages, how do you know it’s the best deal? Unfortunately, you don’t. So you head down the street to get a quote at another bank or you go to a mortgage broker.

Mortgage Brokers

Mortgage brokers match borrowers with lenders. They work as “free agents” for multiple different lenders and earn a fee or commission when they sell a mortgage to a bank. Just like talent agents shop aspiring actors to movie studies, mortgage brokers approach different lenders with borrowers’ applications.

Good mortgage brokers should be able to find borrowers the most competitive rates and also find loans for borrowers with less-than-perfect credit. But there’s a downside: The more expensive the mortgage, the more the broker gets paid. So brokers may have an incentive not to show you the absolute best loans (not to say they all do this).

So shop around and negotiate for your loan just like a home or a car: Don’t blurt out the highest rate you will accept and never be afraid to push for a better deal.

Finding a Mortgage Broker

Many mortgage brokers are independent and work out of small offices or their homes; the best way to find a good one is often to ask friends or family for a referral or pick up a local directory.

Another option is to work online: Sites like LendingTree are essentially virtual mortgage brokers; you enter your application and they shop it around, often instantly, to multiple lenders.

• Start Now: Get Up to Four Mortgage Quotes from LendingTree

Final Tips

Shop, shop, shop. Before signing on the dotted line, investigate at least two of the three options above: a local bank or credit union, a mortgage broker or an online broker. As you shop, try to compare apples-to-apples. Ideally you should be able to compare loans that are for the same term and the same amount with the same down payment. Then, get a detailed breakdown of rates, points, fees and total closing costs.

Finally, even if you have never checked your own credit before, now is the time to get a free copy of your credit report and score. Print out your report and take it to your first meeting with a bank officer or broker; they should be able to give you a rough idea of what kinds of loans you’ll be approved of before they do a hard inquiry on your credit report (some banks charge a fee for a credit pull to discourage “tire kickers”).

Related posts:

1. FHA Mortgage Loans: A Good Idea for First-Time Buyers?
2. Mortgage Rates Briefly Explained
3. Your First Mortgage: How to Apply and Get Approved

And it’s not all good.

Without prying into painful details, here’s a 60-second run-down of what you need to know about the CARD Act.

Watch your interest rates carefully. The new laws make it harder for cards to raise interest rates (for example, they can no longer jack your APR 10% just because you paid a day late). To make up for this lost revenue, banks raised interest rates on virtually everybody before the laws took effect. And that’s not all: Banks may now issue credit cards with super-high “regular” APRs but lower “discount” or “promotional” rates. The banks can then take away “discount” rates for any reason without violating the new laws. Little has changed. The good news is you can always negotiate a lower credit card APR.

Fees, fees, fees. The new laws will cost credit card banks billions in lost interest. Don’t think they won’t make up for it…with fees. There will be annual fees, paper statement fees and even inactivity fees if you have a card but don’t use it. One area analysts expect banks to target? Foreign currency transaction fees. Most cards charge three percent on any transaction in a foreign currency, and it may go up. (Hint: Captial One cards don’t charge that fee, and have pledged not to start; it’s the reason I voted a Capital One miles card the best credit card for international travel.)

Check your grace period. A grace period is the time during which no interest accumulates on charges. Grace periods are what make credit cards free (or, in the case of rewards cards, even profitable) to users who charge regular expenses and pay their balances in full every month. Some cards may begin reducing or eliminating grace periods to extract interest from what the industry calls “deadbeats”—people who pay off their credit card balances every month and thus, traditionally, never made card companies a dime.

Under 21? Getting a credit card may be more difficult. The CARD Act tries to protect you from card companies that want to get you in debt young and keep you there. But you can still get a credit card before turning 21, you’ll simply need an adult’s blessing or be able to document that you have the means to afford the credit.

The Bottom Line

The CARD Act protects card users from some of the slimiest credit card practices, but the fact is this: A credit card is an expensive and risky financial instrument. It’s fine to use credit cards for their convenience, security and rewards, but as soon as you borrow money on a card that you’re going to pay off over time, you’re at the card company’s mercy and you can expect them to make you pay very, very dearly.

So watch your mail carefully. Read everything your credit card company sends you—that next piece of mail may be their polite notice that they would like to begin charging you more money in a way they never have before.

Related posts:

1. The Future of Credit Cards
2. Avoid Credit Card Foreign Currency Transaction Fees
3. Beware Credit Card Rate Jackings (Increases)

But once your credit card raises your APR, how can you get it to go down again? You can always apply for a new credit card with a lower rate, but you need good credit, you may not want another credit card, yadda yadda.

Wouldn’t it be nice if you your existing company would lower your APR on the card you already have? It can be done.

Two Steps to a Lower APR

Step one? Ask.

Your credit card company certainly isn’t going to lower your rate on its own. A large percent of card users won’t complain about their APR (and yet another percentage won’t even know what their APR is—scary!) So your card issuer will assume if they don’t hear from you, they’re getting away with it. So call them up and let them know that your new rate is pissing you off. Explain that you’ve been a loyal customer and rarely or never missed a payment (it will help if these are true). Threaten to stop using the card and take your business elsewhere.

It may work, it may not. If it doesn’t, I give you part two: Ask again.

Yes, part of the secret to a lower credit card APR is asking, but the bigger secret is persistence. The squeaky wheel really does get the grease. Your credit card company most likely documents every call they have with you, including every time you call to bitch about your APR. Call different operators. Ask to talk to a supervisor. Write a letter. Sooner or later, somebody will see that you mean business.

A Reader’s Example

A reader recently opened his Blue from American Express bill to see that his bank’s online payment reached his account a day late. In addition to a $29 late fee, he noticed that American Express hiked his APR from 15.24% to the default rate of 27.7% for 12 months. (The CARD Act now prohibits credit cards from raising your APR unless you are 60 days late, but they snuck this in under the deadline).

As he carries a balance on this card, he grew concerned.

So he called to politely say: “Gee, it looked like I was only a day late because my bank took an extra day to post this payment. I’ve never missed a payment before and I have good credit. Can you forgive this fee and rate hike this once?”

Years ago, I had done this with different credit card companies and they all forgave the fees and rate hikes with one phone call. Unfortunately, our reader wasn’t so fortunate. He spoke with three reps including a supervisor who all gave him the same line: “We’re sorry, but…”

Most people would give up, but this reader decided to try one more time and wrote Amex an email through his secure online communication center. This is what he wrote:

I would like to offer my sincere thanks to the representatives with whom I spoke on Tuesday regarding my increased APR. As I understand, their limited powers were not able to assist me with the dilemma I am facing.

Currently, I am aware that my APR was increased to the default rate due to a late payment for the OCT2009 statement. This payment was delayed due to the timing of the due date, 30OCT, and the processing time that my credit union had allowed for the withdrawal from my account. The payment was processed on 2NOV and noted on 3NOV. Being an independent contractor who is fighting for my own payments, I can understand a company’s need for stringent policies regarding payments. However, increasing my APR by over 10% due to a payment that was 1 business day behind makes me question American Expresses’ goals when it comes to customer service.

I understand that a letter was sent, however being an e-customer I have not expected mail from AmEx for over a year. I understand this will be reset after 12 months, but how am I supposed to remain a customer to a company that has treated me so poorly? If my APR cannot be reduced, I will be forced to seek another company with which I will do business. Please reconsider the decision to increase by APR to the default rate, and I will be more than happy to continue my time with American Express. Thank you.

And the response he received from American Express:

In your recent e-mail to us, you requested a lower interest rate. We have reviewed your account and determined that your current Annual Percentage Rates (APR) were as follows:

• Purchases: Prime (3.25%) plus 23.99%, currently 27.24%
• Cash Advances: Prime (3.25%) plus 23.99%, currently 27.24%

Because you are a valued Cardmember, we have reduced your Annual Percentage Rate(s) to the following:

• Purchases: Prime (3.25%) plus 11.99%, currently 15.24%
• Cash Advances: Prime (3.25%) plus 21.99%, currently 25.24%

This change will be reflected on an upcoming statement. Please keep in mind that interest rates are subject to change, according to the terms and conditions of your Cardmember Agreement.

It was a pleasure to assist you and if there is any other way in which we may be of assistance, please contact us. We appreciate your Membership and look forward to serving you in the future.

Not everybody will have such luck asking for a lower credit card APR, but the secret is you have to ask and you have to be persistent! It worked for this reader; hopefully it will work for you.

Have you been successful in negotiating a lower interest rate? How did you do it? Let us know in a comment.

Related posts:

1. Summary of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009
2. My Credit Card Raised My Interest Rate! Here’s What to Do
3. Credit Card Changes: Five Ways to Protect Yourself

I like to assume that most people don’t start drowning in high-interest credit card debt on purpose. We don’t choose to fork over billions to credit card companies every year because we feel bad that their execs’ planes are getting a little old.

But we do.

As you hopefully know by now, the overarching mistake that leads to all this debt is using credit cards to spend money we don’t have. But again, many people don’t realize this is happening as they swipe their cards. And one dangerous credit card mistake makes this far easier to do. Do you make it?

Do you fool yourself about the value of credit card rewards?

Cash-back and rewards credit cards can put a few hundred extra dollars into savvy spenders’ pockets every year. But the credit card banks don’t offer rewards to pay off customers who will never make the banks money; they offer rewards to bait customers who will pay the banks handsomely. Could that be you? Here are a few reasons it might be:

1. You Love to Shop

For many, big purchases get a little bit easier if you know that you’ll earn a one, two, or three percent “rebate” from credit card rewards. Whether you get a thrill from shopping and credit card rewards push you to make impulse decisions or you’re a coupon and discount shopper who sees rewards points as a “value-add” or “something for nothing” because you would buy the item anyway, watch out.

You may be walking into stores with a devil on your shoulder saying:

Don’t be afraid to shop. You have a cash-back credit card. The price charged on your receipt isn’t really what you’re paying.

Simply put, knowing that you are being “rewarded” can be a powerful and dangerous incentive for spending.

2. You Carry a Balance

Obviously, carrying a credit card balance is never a good idea, no matter what kind of card you have. As you know, credit card companies charge interest on any positive balance during a billing cycle. The higher the interest rate, the more an unpaid balance costs you—even if it’s just for a month or two.

Now, compare two credit cards: one with rewards and a comparable card without rewards. What do you notice? Most often, rewards cards have significant higher interest rates.

And it doesn’t take much debt to outweigh even the most lucrative rewards points.

Let’s take a look a couple of examples. For both, let’s assume that you spend $500 a month on your credit card and also carry an old balance of $1,000. Every month, you pay $550 towards the card (all of your new purchases plus a token amount towards the old balance).

Over a year, with a credit card that pays a standard one percent cash rewards and has a 16.99 percent APR, you’ll pay about $227 in interest and earn $60 in rewards for a net cost of $167. If you did the same with a credit card that has no rewards but a lower 10.99 percent APR, you would pay $142 in interest—a savings of $25.

Now let’s assume you have a $5,000 balance, still spend $500 a month, but pay back $600 a month (your new purchases plus $100 towards interest and the old balance).

With the 10.99 percent no-rewards card, you’d pay about $574 in interest annually. Ouch. But look that that rewards card. You would pay about $913 in interest over the year. Even if the rewards card paid you three percent cash back (less common, but not unheard of), you would still have a net loss of $733 and could save $159 with the lower APR non-rewards card.

Obviously, the bigger your balance, the longer you carry it, and the less you spend in new purchases, the more a lower APR card helps. But the bottom line is any interest you pay quickly cuts into credit card rewards.

3. You Spend Too Little

Have you avoided joining the millions Americans currently swimming in credit card debt? Congrats: you’re living within your means. And unless you’re super-rich, that means you probably don’t spend all that much.
Unfortunately, by spending little, you’ll never unlock rewards cards’ potential.

Some of the most generous rewards cards, like Amex Blue Cash, only dial up their rewards percentage after you meet an annual spending minimum. And most cards have minimum rewards levels that cardholders must meet before they can redeem cash or points rewards. Sometimes rewards may even expire.

If you spend $5,000 a year on your card, a one percent reward is worth $50. Sure, 50 clams is nothing to scoff at, but is it worth going with a card that may have less favorable rates and fees? Only you can decide.

4. You Have So-So Credit

If you have bad credit, you want to improve it. Two things that will not improve your credit are applying for several credit cards and, of course, taking on any new debt.

Especially in the post-2008 credit world, rewards cards require applicants to have good to excellent credit.

Apply for a card with only marginal credit, and you may be declined, which isn’t great for your credit. Even if you get the card, perhaps it shouldn’t be a rewards card. To improve your credit, you want to avoid any temptation to go into debt. If you do need a credit card to start building or reestablishing credit, stick to the most basic card with the lowest APR that you can get approved for. Period.

Would you agree with these reasons to not get a rewards-based credit card? Did any of these points apply to you and you avoided a difficult financial situation? Are there any other reasons that someone shouldn’t get a rewards card?

About the Author: Simon is a recent college grad living in Brooklyn. He writes for an interest rate-tracking Website and maintains his own personal finance blog, the Realm of Prosperity.

Editor’s Note: Thanks to Darwin’s Finance for hosting this week’s Carnival of Personal Finance!

Related posts:

1. Should You Ever Pay a Credit Card Annual Fee?
2. What’s the Best Credit Card?
3. The Better Deal: Cash Back or Miles Credit Cards?

These days, some argue that a cashback credit card is a necessity. After all, if you’re going to shop with a credit card, it doesn’t make sense to swipe a card that doesn’t give you something back in return—whether that’s cash, rewards points, or airline miles.

But the savviest spenders have taken cashback credit cards to a whole new level. Every cashback or rewards credit card works a little differently, but many cards pay higher rewards in specific spending categories like gas, groceries, dining, or air travel.

Pulling out one card while shopping for groceries, another at the gas pump, and another one at your favorite restaurant isn’t that out of the ordinary. Having an arsenal of cashback credit cards at your disposal serves one primary goal: Earn as much cash back as possible.

Let’s look at how a few popular cashback credit cards can work in tandem to optimize your cashback earnings. In this example, my army of credit cards includes:

1. Discover More
• Five percent cashback on rotating categories (for January to March: airlines, hotels, car rentals, cruises)
• 0.25 percent cashback on all other purchases; one percent after spending $3,000
2. Chase Freedom
• Three percent cashback on rotating categories (for January to March: dining, education, childcare, utilities)
• One percent cashback on all other purchases
3. American Express Blue Cash
• One percent cashback at supermarkets, drugstores, gas stations; five percent after spending $6,500
• 0.5 percent cashback on all other purchases, 1.25 percent after spending $6,500
4. American Express TrueEarnings
• Three percent cashback for gas; one percent after the first $3,000 in gas purchases
• Three percent cashback at restaurants
• Two percent cashback for travel
• One percent cashback everywhere else

As you can see, no single credit card will give more than one percent cash back on everything. There are a few guidelines (i.e., “the battle plan”) that I’ve determined to stick to while using this group of cards:

• The Discover More card is used only on the rotating categories.
• The Chase Freedom card is used only on the rotating categories and only if another card doesn’t offer more than three percent cashback.
• The Amex Blue Cash card is always used whenever another card won’t get more than one percent cashback. This helps me reach the higher cashback tier on the card.
• The Amex Blue Cash is used for gas once it reaches the upper cashback tier (instead of the Amex TrueEarnings).

If I were planning a ski trip for January, I’d use the Amex TrueEarnings card to book the bus ticket, the Discover More card for the hotel, and the Amex Blue Cash for the gear rental. Or, in a typical day, I’d fill up my tank with the Amex TrueEarnings card, but pay my electric bill and take out my lady friend with the Chase Freedom card.

These four cards will cover plenty of ground in a world where we can’t escape never-ending expenses. But, I do not suggest that everyone start applying for cashback credit cards on a whim just because they are an aspiring frugalist. There are a few things to consider:

Cashback Limits, Payouts, and Your Spending Habits

• Some cards have a maximum amount of cashback that you can get any single year. Reaching these maximums is a great endeavor but it also means you’ll be saving less for the remainder of the year.
• Every card has a minimum cashback balance that you must reach before you are able to collect it. The more cards you have, the more your cashback will be spread out. It will take longer to redeem your cashback balance.
• If you are not spending enough to make this whole process worthwhile, then it is best to just stick with one or two cards.

After All, They Are Still Credit Cards

No matter how you look at it, they are still credit cards—the quickest portal to debt. Don’t let your eagerness to “save” (in quotes because you are technically spending before you save) put you in a position that could lead to financial ruins. First, learn to use your credit card responsibly and then slowly incorporate these cashback credit cards into your repertoire for smarter shopping.

Do you also have an army of cashback credit cards? Which cards make up your army and what is your “battle plan”? Let us know how savvy of a consumer you are (and hopefully provide some insight for others to build their own “army”).

About the Author: Simon is a recent college grad living in Brooklyn. He writes for an interest rate-tracking Website and maintains his own personal finance blog, the Realm of Prosperity.

Related posts:

1. The Better Deal: Cash Back or Miles Credit Cards?
2. Amex Blue Sky vs. Discover Miles vs. Citi PremierPass
3. Consumer Reports Finds Few Rewards Programs Worthwhile; Names Best Three Cash Rewards Credit Cards

You may have noticed that American Express has been running ads to renew interest in the product that made Amex famous to begin with—charge cards. What’s the deal?

Basically, Amex is betting that as consumers wrestle with the recession, try to spend wisely, and face credit cards that have raised rates and slashed credit lines, Amex’s charge cards will look attractive. Why is that, exactly?

Charge cards like the American Express Green, Gold or Platinum card work like credit cards, with some key differences:

• You must pay your balance in full every month
• There’s no interest, but there is an annual fee
• You don’t have a predefined credit limit

Plus, unlike most debit cards, charge cards:

• Provide fraud and purchase protection
• Pay rewards points for purchases
• Help you build credit

Although Amex charge cards enjoy a classic, sophisticated image, to many young people they mind as well be their great-grandfather’s credit card. Amex is looking to change all that with the Zync Card. So, are charge cards something young people should consider?

Behind the Amex Zync Card

The American Express Zync Card works just like all its other charge cards. You apply for it like a credit card (so although this card is aimed at young people, you need the beginning of a good credit history).

You make monthly charges to the card. (There’s “no pre-set credit limit”, but you generally won’t be able to spend more than what Amex thinks you should be spending in a month based upon your income.) Then, you pay the balance in full the next month.

As with all American Express Charge Cards, the Zync Card has an annual fee. Good news is, at $25, it’s a bargain. The Green Card charges $95, the Gold Card $125 or $175 depending on your rewards program, and the Platinum Card charges $450. Although there are some benefits with each level of card, I have concluded that spending more for the various levels is mostly a prestige thing.

For the $25 annual fee, the Zync Card comes with the Amex Membership Rewards program, but users can also choose to pay an additional $20 a year for four different “packs” that yield additional rewards. For example, the Go pack doubles the points you earn on airfare; the Social pack doubles points at restaurants and on concert and theater tickets. Amex says it may add or adjust these pack benefits according to user feedback.

Should You “Go Charge”?

I started using an American Express charge card about two years ago. Personally, I enjoy having the protection of a credit card without the temptation to rack up debt. I could avoid paying an annual fee and either use a fee-free credit card or my debit card, but I choose to pay a little bit to combine the convenience of both.

I admit, however, that charge cards aren’t perfect.

Even though you have to pay them in full every month, you can still spend money on a charge card when you don’t have the cash in your checking account, making it possible to overspend.

Plus, there’s the “no pre-set spending limit” thing. As I’ve written before American Express cards do have spending limits. Amex takes your credit history, your income (albeit the one you provide to them), and your spending history to calculate how much they think you can spend in any one month. If you exceed that amount, your card can be declined. I ran into this problem when I was using my card for business travel. Traveling for business, I was spending far more than I would’ve on myself, but Amex didn’t see the distinction. That said, I haven’t had a problem since I started using my card just for personal purchases.

• More: Learn About or Apply for the Amex Zync Card

What do you think? Do you use a charge card? Would you be interested in this new American Express Zync Card? Or does the idea of paying a fee something that is neither credit card or debit card seem crazy?

Related posts:

1. American Express Cards DO Have Spending Limits
2. Charge Cards: American Express Offers an Attractive Alternative to Credit Cards
3. More Amex No Pre Set Spending Limit Fun

Authorized FHA lenders may approve borrowers with less-than-perfect credit and with as little as three and a half percent to put down for FHA mortgage loan. Although FHA loans were designed to serve low- and moderate-income home buyers who would otherwise have trouble getting a conventional mortgage; anybody can apply for an FHA loan up to FHA lending limits (by region).

As traditional lenders respond to the recession by making it more difficult to qualify for a mortgage, more borrowers are turning to FHA loans. That’s good news for able buyers, but it may not be good news for the recovering housing market in general. Recent reports indicate the FHA is losing money as current borrowers continue to default. (Anybody surprised?)

That said, you can still get an FHA loan, and with low mortgage rates and the $8,000 first-time home buyer tax credit and $6,500 home buyer tax credit in effect until next Spring; it’s still a very good time to buy a home.

The Pros and Cons of FHA Mortgage Loans

There is one simple reason FHA mortgage loans are attractive to many buyers; it is easier to get approved for an FHA loan. You can get approved for an FHA loan as long as you have:

• “Decent” credit; with a score at least in the 600s
• Three and a half percent for a down payment

Compare that to traditional mortgages, which often require:

• A credit score of 700-plus
• As much as 20 percent down

Although the FHA insures these loans (meaning that if you default the government will pay the lender for any losses on the loan), the borrower still pays for a part of this insurance through FHA mortgage insurance. FHA mortgage insurance is similar to private mortgage insurance (PMI) that lenders require on traditional mortgages when borrowers put less than 20 percent down.

FHA mortgage insurance is paid both as a small one-time payment at the loan closing and as a small monthly payment. Unlike PMI, which must be paid until the loan-to-value ratio drops below 80 percent; FHA mortgage insurance must be paid for at least five years, regardless of how much equity you build. If, after five years, your loan-to-value ratio is below 78 percent, you can cancel the FHA mortgage insurance.

Like your interest rate, how much insurance you pay is determined by your creditworthiness, the value of your loan, and your down payment. Buyers with less-than-perfect credit and less then 20 percent down will always pay slightly higher rates and insurance. In many cases, however, FHA mortgage insurance will cost less than private mortgage insurance for less-creditworthy borrowers.

Is a FHA Mortgage Right for You?

Home ownership is a rewarding milestone, but also a huge financial responsibility. An FHA mortgage loan can help if you have at least three and a half percent to put down. (Gone are the days, thankfully, of 100 percent mortgages). And even though FHA loan credit requirements are less stringent than traditional loans, rumor has it the FHA has updated its “desirable” minimum credit score to 693 from 633.

• What’s Your Score? Check Your Credit Online Now

If you meet these requirements, you still need to be ready. What do I mean? You should have:

• A low debt-to-income ratio. Meaning your monthly auto loan, student loan, and credit card payments are roughly only 15 percent or less than your monthly income. For more, see: How much home can you afford?
• An emergency fund in addition to your down payment. Buying a home comes with all sorts of potential unexpected expenses. Things break. Expensive things. Plus, if you lose income, you’ll now have a mortgage payment you need to make!

Where to Go From Here

Not all mortgage lenders offer FHA loans, so you’ll need to find banks or brokers in your area that do offer FHA loans. Mortgages are complicated, and looking at several different offers can save you a lot of money, so be sure to shop around. Online mortgage comparison sites are a good place to start, even if you end up calling up local banks, too.

• Ready to Buy? Get Mortgage Pre-Approval Online (Includes FHA Loans)

Americans face enormous pressure to buy homes. Most of us look forward to having our own house, but our society also makes home ownership seem like a right, when it’s actually a privilege. So be smart, and make sure you’re prepared to buy a home. If you feel you’re ready, an FHA mortgage may be able to help you get into the house of your dreams. Good luck!

Related posts:

1. What Percentage of Income Can You Afford for Mortgage Payments?
2. Mortgage Application Declined? Here’s What to Do
3. Are You Ready to Buy a Home? An Easy Way to Check

Once upon a time, there was only one alternative to spending with credit cards: cold hard cash. But then came debit cards—accepted everywhere just like credit cards, but without annual fees, finance charges, and the looming risk of lifelong indebtedness.

Today, credit card alternatives are growing steadily and are looking even more attractive. That said, some alternatives to mainstream, unsecured credit cards are total rip offs—like many prepaid debit cards and even many secured credit cards.

Good Credit Card Alternatives

There’s nothing wrong with cash and traditional debit cards, but a couple of new products provide some credit card perks (cash rewards or the ability to borrow for a big purchase) without credit card trickery (minimum payments and creeping interest rates).

Rewards Debit Cards

Debit cards are becoming Americans’ plastic of choice. In 2009, debit card transactions surpassed credit card purchases for the first time in history thanks, in part, to debit cards’ popularity among younger spenders.

That’s great, because it shows that more Americans are becoming debt-averse. As I’ve written before, however, some debit cards have a ways to go to match benefits credit cards offer like cash rewards and fraud protection.

But now, there are rewards debit cards.

PerkStreet Financial offers a debit card tied to a free checking account that pays users one percent cash back on all non-pin purchases. So you can get cash back for your spending without giving business to a credit card company!

Peer-to-Peer Lending

I am a huge fan of peer-to-peer lending sites like Prosper and Lending Club; they let individual investors make loans directly to borrowers. With no bank in the middle, investors get higher returns and borrowers enjoy lower rates on personal loans.

Case-in-point, three years ago I took out a Prosper loan to consolidate debts at a savings of about four percent. Now that my loan is paid off, I’m starting to lend money and an earn eight or nine percent annual return; far better than the paltry one or two percent banks are paying these days.

Although I don’t advocate going into debt, if you absolutely need to borrow money for a big expense, consider getting a 36-month peer-to-peer loan at a fixed interest rate instead of borrowing on credit cards.

Learn more about:

• Prosper Loans
• Lending Club

Not so Good Credit Card Alternatives

I dig rewards debit cards like PerkStreet and the peer-to-peer lending model. But if I were you, I’d stay away from these products that disguise themselves as alternatives to credit cards but will actually end up costing.

Prepaid Cards

Prepaid cards, sometimes called prepaid or re-loadable debit cards, seem like a good alternative to credit cards: You transfer money onto a the card and use it like a debit card; you can only spend what you have. Problem is, these re-loadable cards are loaded with fees.

Each card has a different fee structure, but these are some of the fees I’ve seen on prepaid cards:

• Account opening fee
• Per transaction fee ($1 or $2 every time you use the card)
• Re-load fee
• Monthly fee
• Inactivity fee
• Customer service fee (every time you call them)

Although these cards are often marketed to individuals without bank accounts, I have seen some marketed to college students and otherwise savvy but credit-averse folks.

If you know of a fair prepaid card, let me know in a comment. Otherwise, do your homework before you sign up for one of these cards!

Secured Credit Cards

Although secured credit cards are, in fact, credit cards; I consider them an alternative to regular, unsecured credit cards because you can’t exactly go into debt with a secured credit card.

On the surface, secured credit cards look like prepaid cards. You deposit money into a savings account and that deposit becomes your credit limit. You can make charges on the secured credit card up to your credit limit, and you pay back the charges monthly (either in-full or over time).

The big difference is that secured credit cards report your payment history to the credit bureaus, so you’re building credit history. You can’t go into debt, because you haven’t actually spend money you don’t have. For these reasons, secured credit cards can be a good tool for anybody having trouble building or reestablishing credit. Just be careful, as the majority of secured credit cards are marketed to people with major credit problems and, as such, contain outrageous fees up to several hundred dollars a year.

You’re much better off calling your existing bank and asking if they offer a secured credit card product. Expect to pay an annual fee for a secured credit card, but if you’re looking at a fee over $100, you’re probably being taken.

What do you think? Do you use a credit card alternative that I didn’t mention here? Let me know in a comment!

Related posts:

1. When To Consider a Secured Credit Card
2. I Paid Off My Prosper Loan!
3. Peer-to-Peer Lending Hits a Roadblock

That’s because the CARD Act takes effect this winter and will restrict credit card companies’ ability to raise interest rates on existing customers. If you thought credit card companies were committing usury in the past with APRs of eighteen, or twenty percent; you ain’t seen nothing yet. Cardholders are seeing their rates go as high as 29.9 percent; there’s even a story of man who received a credit card offer at 79.9 percent APR!

How do you know if your card is raising your interest rate? What can you do about it?

How Credit Cards Raise APRs

In general, your credit card company must notify you of any changes to your account, including interest rate increases, by mail (or electronically if you have consented to receive legal disclosures online). Unless you pay late. Most cards’ terms and conditions include a clause that allows them to raise your interest rate if you pay late or go over your credit limit; no notification required.

Manage your cards well? You’re not immune to rate hikes.

My wife just received a notification from Citi that her interest rate will jump to 23.9 percent in December. That’s on a card with a $15,000 credit limit that does not have a balance and has always been paid in full. (We use the card for joint expenses each month and pay it in full).

She received a letter yesterday detailing the change. Unlike other rate increases I have seen, however, this notice had an interesting clause. If my wife were to transfer a balance of $3,000 or more to the card (plus a fee), Citi would actually lower her rate to 9.9 percent on the balance transfer and all future purchases until 2011. Obviously, Citi is just trying to make some money off this account. Since we always pay the balance in full and the card has no annual fee, they never get a dime from us in interest.

Just be sure to watch the mail.

A lot of these credit card rate increase notices look like junk mail. But if you miss them, you may miss your opportunity to opt-out of the rate increases.

How to Opt-Out of Rate Increases

When your credit card company raises your interest rate arbitrarily (i.e., not because you paid late), they must give you the opportunity to opt-out. Usually, you must contact the card’s customer service to opt-out. If you opt-out:

• You can pay off the existing card balance at your current (lower) interest rate.
• When the debt is paid off, or when the card expires, the credit card will be closed.

If you don’t opt-out by the specified deadline, your rate will go up and you won’t be able to do anything about it after the fact. So if you’re carrying a balance and your credit card company notifies you of an extreme rate increase, you should probably opt-out (unless you can pay off the balance in-full immediately). This is the time to forget about whatever effect closing your credit card has on your credit and just get far, far away from this nasty interest rate.

What to Do Next

If you’re not carrying a balance on the card that raised your interest rate, there’s little point to opting-out. As long as you don’t take on debt on that card, who cares about the APR? You might, however, be so outraged with the card company that you want to stop doing business with them. Or, you might want to preserve a lower APR “just in case” you need to revolve a balance on the card in the future.

Try negotiating.

In the past, customers with excellent payment histories could often be successful just calling up their credit card company and saying “Hey, I can get a 13 percent APR with Card ABC or Card XYZ, why should I stay with your card at 20 percent? What can you do for me?”

This strategy is certainly still worth a shot, although you can expect to have a harder time getting concessions from card companies. For one, they know that it’s harder for customers to switch to a new card (due to tightened credit requirements). Second, the card companies need the money. (Not that I expect you to have a lot of sympathy). But with sky-high default rates and the new laws limiting sneaky fees and interest rates that used to make credit card companies lots of cash, they’re trying to figure out how to make money on a totally new playing field. For now, that means charging even their best customers ridiculous interest rates.

Or, get a new card.

If you have really good credit and little or no credit card debt, you’re in luck, because you can probably apply and get approved for a new credit card at a much lower APR than on existing cards you have. (Most cards are offering new customers APRs ranging from 12 to 18 percent; not great, but better than 24 or 29 percent). Your best bet is to apply with companies that are actively seeking new creditworthy applicants, like Chase and Discover. Chase’s Freedom card has been a perennial favorite of card-critics for its simple rewards program, and the new Chase Slate card provides a lower rate, albeit no rewards, for customers who want the flexibility of paying some purchases over time.

• Compare and apply: See my list of recommended credit cards.

What about you? Have your credit card interest rates gone up? How high? What have you done about it? Please share your story in a comment.

Related posts:

1. Beware Credit Card Rate Jackings (Increases)
2. Summary of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009
3. Credit Card Changes: Five Ways to Protect Yourself

But as one person already commented—banks will cancel your credit cards if you don’t use them. Because you want to keep at least two credit cards open to continue building credit, you want to make sure the two cards you keep stay open. So you should use them from time to time.

Re-Think Your Credit Cards! from David Weliver on Vimeo.

What Credit Cards Do Best

The real argument for spending with a credit card instead of a debit card or cash is not the rewards you’ll earn. As I mentioned yesterday, credit cards play with your psychology and actually make you spend more than you would with cash. The real benefits credit cards offer that you can’t get from other payment methods are:

• Fraud protection
• Leverage in disputes with merchants
• Travel insurance and convenience

Credit cards are better for fraud protection because if they’re stolen, the most you’ll be liable for is $50. Plus, if somebody makes fraudulent charges, it’s not your money they’re stealing; it’s the bank’s. Also, if you make a purchase with a credit card and the merchant ends up charging you too much or doesn’t fulfill its obligations, the credit card company can help you dispute that charge. In many cases, you won’t have to pay the charge until the issue is resolved. If you had paid cash and gotten ripped off, your money is already long gone.

Also, most credit cards provide some minimal travel insurance programs. If you book air travel with a credit card and the airline damages your baggage, your credit card may cover some of the loss. Ditto for car rentals. Rent a car with a credit card, and the card provides some level of additional insurance if you bang up the rental.

Last but not least, credit cards are far more convenient than debit cards or cash when you travel. Hotels and car rental agencies need deposits—sometimes several hundred dollars. With cash or a debit card, you actually need to give them this money up front. With a credit card, they just put a hold on a portion of your credit line; you never have to part with any of your money for the deposit.

How To Use Your Two Credit Cards

With some of these benefits in mind, here’s how to best use the two credit cards you keep open. Use the card with the higher credit limit for:

• Big purchases, say over $100
• When you travel

You’ll protect yourself when you make big purchases and it’ll be far more convenient to travel. You may not use the card every month, but you should use it enough that the bank won’t cancel your card. Of course, pay the card in full every month.

Use the second credit card for a few fixed monthly expenses. I recommend setting up your card to automatically pay a few monthly bills, such as:

• Your gym membership
• Your cell phone bill
• Your car insurance

You’ll pay one bill every month instead of three, and you’ll be keeping that card open and building credit at the same time.

Re-Cap

So between yesterday’s post and today, I’ve laid out my new strategy for using credit cards minimally and wisely. The strategy is this:

• Cancel all but your oldest credit card and the card with the highest credit limit
• Use one card for big purchases and travel
• Use the second card for a few recurring monthly bills

What do you think? Good idea? Do you want to scream at me for suggesting people still use credit cards at all? Think I’m stupid for not recommending people take more advantage of rewards? Let’s hear it!

For a case study of this strategy, please see “I have seven credit cards. Should I cancel any of them?“

Related posts:

1. Radically Re-Thinking Credit Cards: Part One
2. Charge Cards: American Express Offers an Attractive Alternative to Credit Cards
3. Discover Escape Card Offers Rewards Few Cards Can Match