All about credit cards
- October 29, 2009
- 0 comments
- Posted in Credit Cards, Latest Posts
Credit cards can be the cheapest way to shop. I use them to save money all the time. They’re cheap, that is, IF you choose a no-fee card, pay the monthly bills in full and on time, and collect “reward” points toward plane tickets that you actually use. When you pay no fees or interest charges, your flight is free. If you’re not a traveler, choose a cash-back card that will refund 1 or 2 percent of the value of your purchases, up to a certain amount. Used this way, your credit card is not only a convenience, it’s a bargain.
Prompt payers also build a good credit history, so that you can borrow at lower interest rates. I don’t even carry much cash any more. It sits in my money market deposit account, earning a sliver of interest until I take it out to pay the bills. I use my card for purchases of all sizes, including bus cards and coffee. Even a bus card can get me a few more points toward a free flight to see one of my kids. How bad is that?
But credit cards are the most expensive way to shop if you carry balances all the time, pay interest every month, and occasionally exceed your credit limit or pay late. Late payers might be hit with penalty interest rates of 30 percent or more. As a result, your rewards points or cash-back checks are no longer free—you’re paying for them with fees and interest charges. Those high credit-card costs effectively raise the price of everything you buy. What a waste. The key to financial independence is shucking that debt.
SEVEN WAYS OF HOLDING YOUR CREDIT CARD COSTS DOWN
1. Pay the bill as soon as it arrives. That way, you won’t forget it and accidentally pay it late.
2. Don’t use those “convenience” checks that your bank sends in the mail. They’re cash advances on your credit card and carry a super-high interest rate. The bank also doesn’t let you pay it off fast. You’re forced to stre-e-e-etch it out, running up interest costs all the time.
3. Don’t charge any more than 30 percent of your credit limit, on any card. If you do, your credit score will drop and your interest rate might rise.
4. Don’t apply for another card if you already have several of them in your wallet. More cards make you look like a higher risk, especially if you apply for two in a row. This includes applying for a zero-interest card in order to transfer expensive balances. People perceived as higher risks pay higher rates.
5. Carry only one rewards card. If you own several of them—for airline miles, cash back, and catalog purchases—you might not accumulate enough points on any one program to make it worthwhile.
7. Don’t pay only the minimum. That’s never going to get you out of debt.
SOME INTEREST-RATE OUTRAGES THAT OUGHTTA BE ILLEGAL
–“Fixed” rates. “Fixed,” NOT! If you believe that, you’re just the kind of sucke—er, just the kind of customer, the bank wants. The credit agreement’s fine print will tell you that the bank can change rates, fees, and other terms whenever it wants and for any reason. Be assured, it will.
–Mystery rates. The ads reel you in by trumpeting interest rates “as low as” 7.9 percent. But that’s only for applicants with the highest credit scores. If your score is just average or even above-average, you’ll pay much more. The gyp is that your rate is a mystery. You can’t find out what you’ll be charged until you apply and the card comes in the mail, which makes it impossible to comparison-shop.
– Default or “penalty” rates. These also give the lie to the low rates that you see in ads. Every card has a default rate that it charges people who make mistakes. Were you a little late in paying your bill? Did you accidentally charge more than your credit limit? A slip will bounce your rate up to 24 to 41 percent, depending on the card and your crime. You might as well borrow from a loan shark. Oh, wait… you have!
–Residual interest. Never heard of this? Neither had I until I got smacked. I missed paying a bill in January (don’t ask!) but paid in full in February. On the March bill, I found a small additional interest charge. It turned out that the bank kept charging interest from they day they sent me the February bill until the day my full payment was credited to the account. That’s another cheat. To avoid the charge, I’d have had to call my bank in February, ask how many more nickels and dimes would accumulate over the next few days, and include that amount with my payment.
–Teaser rates. These are the super-low, temporary rates that card issuers dangle when they’re trying to sign you up. Sometimes they cover only balances transferred from another card, not new purchases. When you’re choosing a card, the standard rate is the one to evaluate. Your best long-term bet: the card with the lowest standard rate you can find, even if it lacks a spiffy introductory offer.
–Variable interest rates. The majority of cards today charge variable, or floating, interest rates on your revolving balances. Typically, you pay a fixed number of percentage points over the bank’s prime rate (the prime is the benchmark lending rate). Applicants with impeccable credit histories can get no-fee cards charging 2 or 3 percentage points over prime. A decent history gets you 5 or 6 points over prime. Banks send cards charging 8 percent or more over prime to anyone with a heartbeat and a mailbox and charge high penalty rates the first time a payment is late.
Tags: credit card costs, credit card fees
