Tips on Credit Cards

6/1/2009

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Remember When?
Americans use credit cards so frequently that it's hard to imagine a time when we functioned without them. In June 2007, total U.S. consumer revolving debt reached $904 billion, up from $879 billion at the end of 2006.We use credit cards so frequently that it's hard to imagine a time when we functioned without them.

If you think back to the day your first card arrived in the mail, you may recall your excitement. You now had the means to purchase things, whether or not you had the money in the bank. You probably kept careful track of your purchases, knew your exact credit limit, and vowed to make all payments by the due date.

What's happened since then? Do you still use credit responsibly, or have you started to take it for granted? Are you denying a growing debt problem?

Take a simple test.
Without peeking at your credit card statements, what is the total amount you owe on all of your cards? What interest rate(s) are you paying? How often do you incur extra fees because your payment was late or become you've gone over your credit limit? Do you typically make only the minimum payment?

How well did you do? If you are "in the dark" about your credit cards, you may be putting yourself at financial risk. Credit cards can be a great convenience and help in budgeting, if they are used wisely. When used irresponsibly, they can trap you in a cycle of debt. Bankrate.com estimates that the average household carries a credit balance of nearly $9,000 and pays more than $1,000 in interest and fees each year.

Whatever your credit card habits, there is always room for improvement. Whether you are a long-standing cardholder or seeking to qualify for your first credit card, the following information can help you use credit responsibly.

So Many Choices!
A credit card is a plastic card that can be used to make purchases or obtain cash advances today and pay back the money later. The card comes with a line of credit extended by the financial institution or retailer that issued the card.

Credit cards provide a revolving line of credit. As you pay down your balance, that credit becomes available to you again.

You can avoid paying finance charges by paying your balance in full by the due date. If you choose to make your payments over time, you are charged interest. The longer you take to pay off your balance, the more you will pay in interest.

In addition to interest, most credit card issuers charge cardholders an annual fee, and impose other fees for cash advances, late payments, exceeding the credit limit and other cardholder infractions.
Standard general-purpose credit cards (Visa, MasterCard, American Express, Discover) can be used to pay for nearly anything, wherever that card is accepted. Limited-purpose cards or private-label cards, can be used only at certain stores or retail chains or for specific purposes. These include store and gasoline credit cards.

Some credit cards offer special enhancements. These cards, which typically require a better-than-average credit record and may entail higher fees, include:
  • Cash Back Programs that offer cardholders cash-back rewards. The more the card is used, the more cash rewards you earn.
  •  Reward Cards that permit you to accumulate points based on how much you use the card. The points can be redeemed for gas rebates, entertainment rewards, product discounts or other purposes. 
  •  Co-branded Cards that bear a company or association name/logo and offer rewards to specific customer groups or members. These include airline co-branded cards (that reward airline miles) and cards branded by auto manufacturers, associations (like AAA or AARP) and credit unions.
  •  Affinity Cards are all-purpose cards sponsored by professional organizations, educational associations, and other non-profits. Generally, the sponsoring organization receives a percentage of profits generated by card users. 
  •  Low-interest Cards offer low APRs or advertise interest-free terms. The introductory rate typically changes to a higher rate within a period of time.

If you have no credit record or a poor credit history, you may want to apply for a limited credit card or a secured credit card. Cards with limited credit generally require an application fee, but they do allow you to establish a consistent credit payment record which can lead to an improved credit history. Secured cards require a security deposit. They can be linked to the cardholder's bank account, which permits the card company to deduct money if you miss a payment. Secured cards offer low credit lines ($250 or so) but they do help people trying to establish or improve their credit record. Interest rates can be high for secured cards and they may charge an application processing fee. Not all issuers will pay interest on your deposit.

If you have an excellent credit record and substantial income, you may quality for a Premium card. Otherwise known as Platinum or Gold cards, Premium cards offer higher credit limits than standard cards and special member benefits (travel insurance, product warranties, emergency services and the like). Premium cards typically charge higher fees than do standard credit cards.

Credit Terms and Definitions
When shopping for a credit card, carefully consider the credit terms and conditions. Following are helpful definitions:

  • The Annual Percentage Rate (APR) is the finance charge (the interest rate and other charges) that you will be billed on a yearly basis. The APR can be a fixed rate or a variable rate. Variable APRs are tied to an economic index and fluctuate with the market. Fixed APRs are set by the card company, but can change with advance notice to the cardholder.
  • The Annual fee is a flat fee paid by the cardholder (anywhere from $25 to several hundred dollars). Not every card issuer charges an annual fee; if not, they may charge a higher interest rate or penalty fees. 
  •  A Finance charge is the dollar amount you pay when you use your card. In addition to interest costs, it may include other charges associated with transactions, such as cash advance fees. Card issuers vary on how they calculate the finance charge (see discussion of Average Daily Balance below).
  • The Grace Period is the number of days (from 0-30) you are granted to pay your credit card bill without a finance charge. The grace period typically applies only if you pay your balance in full each month. If you have an outstanding balance, there is no grace period on new purchases. Grace periods typically do not apply to cash advances or other transactions.
  •  Average Daily Balance is the most common method used to calculate the finance charge. The card issuer takes the amount of debt you had in your account each day during the billing statement period and averages it. Two other ways to calculate finance charges are the previous balance method (the issuer uses the balance outstanding at the end of the previous period) and the adjusted balance method (the balance is obtained by subtracting the payments you have made from the previous balance).

Which Card is Right for Me?
Selecting a credit card that's right for you will depend on your particular circumstances, spending practices and preferences. The APR should not be your only consideration. You want to select a card that best suits your budget and repayment plans. Ask yourself the following: 

  • Am I currently in debt; if so, how much do I owe? Does it make sense to take on even more debt? Should you focus instead on paying down your current obligations and establishing a savings account to cover emergency expenses?
  •  Why do I need a credit card? Is it just for emergencies? Are you getting a card for unwise reasons - i.e., to take cash advances to pay off existing credit card debt? If you are considering a balance transfer to a low-interest rate card, read the section below on Balance Transfer Options.
  • Do I have too many credit cards? This is a personal decision, but you should keep in mind that the credit limits on your various credit cards do impact your credit score, as does the total of your outstanding balances. Credit reporting agencies consider the percent of your available credit that you are using when determining your creditworthiness. Are you maxed out or near your credit limits?

Now look at your spending practices and preferences. Ask yourself:

  •  How will I use the card? If you plan to use the card for purchases on a frequent basis, the purchase APR is important. If cash advances are your priority, seek a card with cash advance fees and a cash advance APR that you can afford.
  • Is the credit limit too high, too low or just right? Be honest. If a super low credit limit is not going to meet your needs, be aware that you'll likely end up paying over-the-limit fees. If the credit limit is too high, will you be able to resist the temptation to keep charging until you hit that ceiling?
  • Do I plan to carry a balance? If you always pay your monthly bill in full, it might make sense to get a card that has no annual fee and a generous grace period. If you intend to carry a balance from month to month, note the APR for purchases. 
  •  What perks am I likely to use? Enhancements can include cash rebates, purchase protections or warranty guarantees, travel accident or car rental insurance, product discounts and usage incentives (like frequent flyer miles). If you don't plan to utilize the perks, it may be harder to justify the higher interest rate or annual fee.

The Pros and Cons of Credit Cards
There's no doubt about it. Credit cards offer great convenience and a safe payment mechanism. They can be helpful in tracking expenses and serve as a useful source of emergency funds.
You should never forget, however, that credit cards are a form of short-term finance that does cost money. The amount of money varies on the features and fees of the particular card. For some people, credit cards are too great of a temptation. If your household operates without a budget, you could find yourself in trouble if you use your card(s) without careful consideration or planning.

Carefully Read the Disclosure Box!
All credit card solicitations and applications must include certain key details in a disclosure box. It is vital that you understand the terms and conditions you are agreeing to as a cardholder.
First is the APR for purchases. Is the interest rate fixed or variable? Look for details on Other APRs (for cash advances, balance transfers or penalty rates). Some cards have tiered APRs in which different rates are applied to different levels of the outstanding balance. A penalty APR is applied by some card issuers if you are late in making payments on that card or any other card! Sometimes the APR is a teaser rate that will increase in a matter of months.

Also consider the annual fee and grace period. Look at the finance charge calculation method and check to see if there is a minimum finance charge. Finally, review the fees. Is there a transaction fee for cash advances, a balance-transfer fee, and any penalty fees (late payment charges, return-check fees, over-the-credit-limit fees)?

Looking to Thin Your Wallet?
If you're looking to rid yourself of too many credit cards, or to select a card to use most frequently, completing this chart might provide some clarity: 
               
   

Credit Card

Current Balance

Credit Limit

Minimum Monthly Payment

APR

Grace Period

Fees (annual; cash advance; late payment)

Enhancements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          
               
               
              
Review the information. Select the card(s) with the features that best suit your budget and usage patterns. If your preferred card carries a higher APR than your other cards, call the issuer to see if it might be willing to lower your current rate instead of losing you as a customer. If not, ask if they have another card plan that better fits your needs.

When considering cards with reward programs or extra enhancements, decide if you use the card enough to justify any extra costs; if you make unnecessary purchases just to earn the rewards; and, if the program discourages you from comparison-shopping.

Balance Transfer Offers
Not all balance transfer offers were created equal! Carefully consider the terms of the offer. Is there a transfer fee? How long is the lower interest rate in effect? Does it apply only to the transfer balance, or does it also pertain to purchases and cash advances? Once you transfer a balance from another card, tiered pricing typically goes into affect (a low interest rate for the balance transfer; a higher rate for new purchases). The low-interest balance gets paid off before the higher-rate new purchases.
 
Keeping Current with Your Payments
It is very important to make timely payments on your credit cards. If you do run into trouble making even the minimum monthly payment, don't ignore the problem. Stop charging anything else on your credit card(s). Then, contact your credit card issuer to advise when you will be able to make a payment, and how much you expect to be able to pay. If your troubles are not temporary and you foresee a rough road ahead for your financial situation, contact a professional credit counseling agency for assistance. They will be able to evaluate your current situation and propose a plan.

Stop the Madness!
Once you have your credit card "house" in order, take action to prevent future temptation. You have the right to opt out of receiving unsolicited credit card offers. To do so, call 1-888-5-OPT-OUT or visit www.optoutprescreen.com online. This service is operated by the four major credit bureaus, and you be asked to provide your birth date and Social Security number. Once you opt out, companies have 30 days to comply.

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About ClearPoint (www.clearpointcreditcounselingsolutions.org )
ClearPoint Financial Solutions is a national 501c3 nonprofit credit counseling agency licensed to operate in all 50 states. ClearPoint’s mission is to help people who are struggling with debt regain financial control over their lives through education. Our accredited financial specialists provide budget, housing and bankruptcy counseling in person, over the phone or via the Internet to over 50,000 people a year. They teach consumers how to manage their money better, pay down debt, and save for a secure financial future. ClearPoint is a system-wide Accredited Business of the Better Business Bureau. We are a member agency of the National Foundation for Credit Counseling, and meet the highest standards of the Council on Accreditation

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