|There is one thing more painful than learning from mistakes (our own or somebody else's): Not learning from them. - Barbara Johnson|
Credit Card Pointers
Credit cards are a way of life these days. It's hard to imagine how we got along without them. There are some pitfalls which are discussed below, but as long as you are able to keep them under control, they can work to your advantage.
Credit cards are a convenience. If you pay off your balance every month, you can to hold on to your money longer and pay no interest on your purchases. Every month you get a detailed statement which shows you where your money went and also provides an easy record of everything you bought.
One big advantage of paying with a credit card over paying cash is that you have recourse if there is a problem with the item. Let's say you bought something and it turned out to be low quality or defective or you bought it online and never received it. Then when you try to get a refund, you're told that the item is not returnable or that they did send it and you are just stuck. If you charged the item to your credit card, you can file a claim with them. If they agree with you, they will refund your money.
Then there are the rewards credit cards where you actually get cash back or other rewards like free airplane tickets, car rentals, hotels discounts or merchandise. All for simply buying what you need.
Below you will find some credit card pointers.
Credit Card Interest Rates and Other Charges
Credit card companies are in business to make money. And there are many ways they do that. Here's a list of the interest and fees they can charge. Read the fine print before you sign up for a card. Knowing what fees and interest they charge will help you understand how much using credit could cost you. With some knowledge, you can get a handle on your finances and avoid paying more than you have to.
Annual Percentage Rate (APR)
The APR is the one you hear the most about. The APR is expresses as a yearly rate. Lets' say that the APR is 10%. If you bought a couch for $1,000 and kept that purchase in your account for one year, the couch could cost you $1,100. Of course, it's not that simple because you would probably be paying off part of the couch every month. But you get the idea of how it works.
Also, note that it isn't uncommon to find APRs of much higher rates.
The periodic rate is expressed as a percentage. It is applied to the outstanding balance every month (period).
Credit card companies want your business. To lure you into applying for their card, they may offer an introductory interest rate which is much lower than their normal rate. Be sure to note how long the introductory rate will last. Also, note what the rate will be when the introductory period is over.
Because credit card companies want your business, they try to get you to transfer your balance from your current card to theirs. They do that by offering a low interest rate on any balance you transfer. The rate may even be zero. Be sure to check to see how long the rate will last.
Also, there may be a fee for transferring the balance.
Interest Free Period
This is the period between the day you make the purchase and the day the interest on it begins. Some companies charge interest immediately when the purchase is made, but most have a grace period. If you take advantage of the interest free period and pay off your balance before the due date, you can charge things and never pay interest on them.
This is a fee which is charged each year for the privilege of using the card. Not all offers charge this fee.
These are fees applied each time you make a transaction. Most companies do not charge a transaction fee for purchases. But they may charge one for cash back or for withdrawing cash from an ATM.
Cash Withdrawal Rates
The interest charged for cash withdrawal is usually higher, and can be much higher, than the interest charged on purchases. Often there is not a grace period, or interest free period. You are charged from the date you make the withdrawal. In addition, there may be a transaction fee for a cash withdrawal.
Using your credit card for a cash advance is not a good idea. It can be very expensive.
How Credit Cards Affect Your Credit Score
When you are just starting out on your own, you will, of course, have no credit. One simple way to begin establishing a credit history is to get a credit card. Your first one will undoubtedly have a low limit. But that is OK. Your limit will soon be increased if you show that you are responsible with the card, paying the bill when it is due. As you use the card wisely, you will create a credit record and raise your score.
But be sure that you pay your bills on time each month. If you don't, it will be reported to the credit bureaus and negatively affect your credit score. If you ever want to take out a loan, say for a car, you will pay a higher interest rate if you have a low FICO score. Having a good credit score is more important than that, though. Some companies check your credit score before hiring you. If you have a low score, it could limit your employment opportunities. Businesses like cell phone companies also check your credit standing and may not set you up with a plan if they think you are not a good credit risk. Insurance companies want to know your score when they are deciding whether or not you are a good risk.
Watch how much you charge. It is best to keep your credit card bill below 30% of your available credit. The credit bureaus look favorably on that.
If your credit score is low, you can help raise it with your credit card use. Follow the guidelines above. You may have to settle for a card which does not have the best terms, but as your score improves, you can get a better one. You may even have to get a secured credit card. That is a card where you deposit some of your own money to an account associated with the credit card. If you do not pay your bill, the credit card company can withdraw some money from your account to cover your purchases.
Tips for Paying Your Credit Card Bills
It is important to pay your credit card bills on time. If you do not, your credit score can plummet, making it difficult to get a loan for a car or to buy a house. Here are some tips about paying your credit card bills.
Pay More than the Minimum
It's tempting to pay only the minimum when the bill comes due. But that is really a bad strategy. It can lead to more and more debt to the point where you don't see how you can ever pay off the balance. Plus the interest you end up paying can be huge and a total waste.
A better strategy is to pay off more, much more, than the minimum due. Yes, that can be hard. But it is crucial if you don't want to end up in a huge mess down the line. Here's a hint: Spend less! Ouch, that hurt. Yes, we know that having a credit card allows you to get what you want when you want it. But some self control now will help keep you from being out of control later.
Get a New Card with a Low or 0% APR
Besides paying off more than the minimum, you can look for a new credit card that offers an introductory interest rate which is quite low of even 0%. These are called balance transfer credit cards. Transfer the balance of your high interest card to one of these cards. Be sure to note how long the introductory rate lasts and what the new rate will be when that one ends. Take the money you save in interest and use it to pay off the balance.
Keep Track of Your Money
It is important to know where your money goes and to stick to a budget. There are software programs available which make that task an easy one. Quicken and Microsoft Money are two popular money handling programs. Get one of these programs and then use it!
Use Your Savings or Investments to Pay Off Your Credit Card Bills
If you managed to save some money or if you have investments, it is worth considering cashing them out to pay off your credit card bills. The interest on your bills is probably much higher than what you earn on them. Follow this strategy carefully because it can leave you with little of nothing to fall back on in an emergency.
The real key to paying off your credit card bills is to stop spending more than you earn. One of the software packages we mentioned will be helpful in doing that. Perhaps you have to do something as drastic as cutting up your cards and throwing them away. That way, if you don't have the money to buy something, you simply don’t buy it. Eventually, you can catch up on what you owe and get out of debt.
0% APR Credit Card Offers
A credit card with no interest? It sounds too good to be true. Well, it is true, but with a catch. The 0% rate does not last forever. Even so, a card which offers this rate can be an advantage, if you are careful. Here's what you need to know.
How Does It Work?
If you qualify for the card, you pay no interest on purchases at the beginning. You may also not pay interest on cash advances. This interest free period can last from three months to a year. Read the terms to find out how long you will go without paying interest and whether the 0% APR applies to cash advances.
Things to Look For
You know the 0% APR will not last forever, but what happens when the period is over? You may find that the new interest rate is very high. There may also be penalties and fees if you have a balance at the end of the introductory period.
One other important thing to look for is whether the new interest rate will apply only to purchases made after the new rate starts or if the new rate will be applied to any remaining balance left over from the 0% introductory rate.
Knowing all the terms and conditions will help you determine if the card will save you money or end up costing you more in the long run.
How to Make a 0% APR Credit Card Work to Your Advantage
After reading about what to look for, you may think that these offers will not really save you any money. Actually, you can make these cards work to your advantage if you are careful.
Pay off your balance before the introductory period is over. Then you will not be charged the new, higher rate on them. And you will, in fact, have use of credit without paying any interest.
Also, choose a card carefully. Find one which has a low APR after the rate goes up. Then you can have it both ways - no interest in the beginning followed by a low interest rate after that.
Balance Transfer Credit Cards
Balance transfer credit cards are similar to 0% APR cards. They can be beneficial if you find that your credit card company has increased your interest rate. Or you may have initially qualified only for a credit card with a high rate and now you find that your credit score has improved and you qualify for a better card.
If either of these scenarios is the case, take advantage of a balance transfer card. You can save hundreds of dollars.
Don't Transfer Your Balance Too Often
Opening a new credit card usually causes a temporary lowering of your credit score. That will disappear after a year or two. But if you open new credit card account to transfer your balance, say, every six months or so, it can have a serious impact on your credit score.
However, if you are trying to get out of debt and you have learned to stop using your credit card to buy things you cannot afford, and you simply want to take advantage of a balance transfer credit card to keep your interest rate low, then go for it.
Wait For the Right Offer
Since opening too many credit card accounts too close together can lower your credit score, don't jump on the first offer you see. Compare them carefully and choose the one with the best terms.
Steps to Take to Avoid Credit Card Fraud
Although it is not possible to be completely safe when using a credit card, there are steps which you can take to make it harder for the crooks to win. Here are some tips.
Do Not Use Wireless Devices to Give Credit Card Information
Portable phones, cell phones, Bluetooth devices, wireless networks, wireless keyboards, etc. have a range which may surprise you. It is simple for someone to intercept the transfer of information and get all the information they need to use your credit card.
Compare Your Receipt to What You Owe
Some credit card processors are connected directly to the cash register. In that case, you know that what you are being charged is correct. But some processors require the amount to be entered manually. A mistake can easily be made. Or a dishonest person can charge you more than you owe. Always compare the amount on the receipt with the amount on the case register.
Keep Your Card in Sight
When you are using your credit card, do not let anyone take the card elsewhere else to process it. Unscrupulous people may swipe your card to pay the bill, then swipe it again through a scanner which copies all the information making it easy for them to get all your information and use your credit account at will.
This, of course, is hard to do if you use a credit card at a restaurant. They always take it to the register to process your bill. A safer thing to do in that situation is to pay with cash.
Destroy Copies of Your Receipt
You need a copy of your receipt to reconcile your statement. Keep it safe. Do not throw it out in a public place. After you compare it to your bill, shred it.
Your receipt may contain your entire card number, expiration date and also your signature, making it easy for a thief to steal.
Be Careful Online
Some credit card companies offer fraud protection for online purchases. If you buy online, only use a card with this protection. Also, shop only at secure sites. You can tell if a site is secure (the data being transferred is encrypted) if there is a little padlock symbol on the site. This is usually found at the bottom of the screen.
Be Wary of the Telephone
Do not ever give your credit card information to someone who calls you on the phone. They may be smooth talkers and claim to be from a reputable company, but do not believe them.
Keep Your PIN Secret
Keep your PIN in your head. Do not write it down. Don't even tell your family or friends. That is the only way to be completely safe.
Establish Your Credit with a Secured Credit Card
If you have no credit history or bad credit, a secured credit card may be a good option for you. The way this card works is that you deposit a sum of money into an account, then you are issued a credit card with the credit limit based on the amount of the deposit. If you do not pay off your bill, the company has the option of withdrawing what you owe from the money on deposit. There is no risk for them. Anyone can get a secured credit card, even someone who has applied for bankruptcy.
Compare the offers. Some companies require up to 200% of the credit line to be deposited. That means that if you deposit $2,000, you can only charge $1,000. Others require as little as 10%. Shop around for the best deal.
Use a Prepaid Card to Increase Your Credit Score
If you are just starting out and have no credit history or if you have bad credit and want to increase your score, a prepaid card may be the answer. With a prepaid card, you deposit some money into an account, then when you use the card, you withdraw from that amount. For a small fee, some companies will report your activity to the credit bureaus.
Good for Students
A prepaid card works well for students. They don't have to carry cash or write checks. They can simply use this card which works just like a credit card and can be use for online purchases. But there is no concern about spending too much and getting into debt.
Easy to Get
Most prepaid cards have a guaranteed acceptance because there is no risk for the credit card company. You are using your own money. They do not have to do a credit check.
Advantages of Prepaid Cards
Disadvantages of Prepaid Cards
There can be many fees associated with the use of a prepaid card. Carefully read the terms before you sign up. Here are some of the fees to watch for.
As with everything else, these cards are competitive. Carefully read the terms of the agreement before you sign up. Some are better than others. Choose the one with the lowest fees.
Advantages and Disadvantages of Debit Cards
A debit card is associated with your checking account. Unlike a credit card, you are spending your own money. The advantages to using a debit card over a credit card are:
But the disadvantage occurs if your debit is lost or stolen and used by some thief. As with a credit card, you are not liable for unauthorized purchases. But unlike a credit card, until things are all sorted out, which can take a while, your money is gone. With a credit card, the thief has used the credit company's money. With a debit card, they used your money. And it can take a long time until you get it back.
You Can Get Your Credit Card Interest Rate Reduced
The credit card industry is extremely competitive. And this can work to your advantage. Interest rates vary greatly. Some can be higher than 20%. And you can find that you've gotten a notice out of the blue that your rate has gone up. Fortunately, you have a couple of options.
The first option is obvious. Apply for a new card. Compare cards and take advantage of low introductory rates. But be sure you check the details to see how long the introductory rate will last. Check on other fees also, like an annual fee. As long as you have a reasonable credit score you should be able to get a better card.
The second option is not so obvious. You can actually talk to your credit card company and ask them to lower your interest rate. And, amazingly, they may do it. They want to keep your business. It's better for them to get less money from you than it is to get none at all. Try this strategy if you find you do not qualify for a new credit card with a lower rate. But before you call, get some facts. Have specifics on other credit card offers to compare with the interest rate they are charging you. You may not qualify for any of those offers, but they don't know that. Read more about how to go about calling the company to ask them to reduce your interest rate.
Don't Use a Pay Day Loan to Pay Off Your Credit Cards
Taking out a loan to consolidate your debt may be a good idea. But one kind of loan you should never get is a payday loan.
What is a Pay Day Loan?
A pay day loan is simply an advance on your pay check. The loan company knows you have a pay check coming soon and are willing to lend you money based on the amount you'll get paid. You write them a check to pay back the loan and post date the check to correspond with the date you will get paid.
Why is a Payday Loan a Bad Idea?
These companies make huge profits at your expense. The interest they charge can be as high as 20% to loan you money for one or two weeks. If you figure the annual percentage rate, it can be as high as 400%!
Then, think about it. If you borrow money from your next pay period to spend now, what happens when the next pay period gets here? You are short the amount you borrowed plus the interest you paid. So you have only compounded the problem. You may need to borrow again. But you will soon get yourself into a never ending cycle that is hard to get out of.
How to Avoid the Need for a Pay Day Loan
What you really need to do is have some money set aside for emergencies. Then when those emergencies happen, and they will, you can use that money instead of taking out an expensive loan or using a credit card. Set aside some money from each and every paycheck. We know that may be hard to do, but it is important if you are going to avoid a financial meltdown in the future. Discipline is the key. Put the money aside FIRST. Then spend what is left over. If you don't have the money, don't spend it. That is they way to financial freedom.
A Dirty Trick Some Credit Card Companies Play
Most credit card companies have an interest free period. That is the time between when the purchase was charged and the date the bill is due. Whatever balance you pay off during this period is not charged interest.
But read the fine print of your contract. Some companies are playing a dirty trick. If you do not pay the balance in full, but carry a balance to the next month, they may eliminate the interest free period and charge interest on new purchases immediately. If you can, avoid using a credit card from a company which plays this trick.
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What the Government Has To Say About Credit Cards
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