Don’t Let Credit Cards Own Your Paycheck

Posted: 24 Aug 2008 | Categories: Credit

If you’re like me you don’t give much thought to choosing a credit card except maybe getting it for the interest rate. Sometimes people choose a credit card because of its design or security features, the bank issuing the card, the interest rate or if it is one those pre-approved card where all you do is fill out a short form and send it in. I think most consumers read the BIG print and give little thought to the small print which is where the credit card companies rack up the most profit against you.

What’s important first before anything else is to compare the features of the various credit card offers you receive. The best way to do that is to compare each card against each credit card provider for the best deal for you and your financial situation.

Keep in mind, that when you sign the credit card application that you are agreeing to the terms set forth by the credit card company which can change without notice. Additionally, your signature acknowledges agreement to the terms and creates a legally binding contract so to speak. When choosing a credit card here are some important terms (the small print) you should be familiar with:

Annual percentage rate (APR): The APR measures the cost of credit on an annual basis. The lower the APR, the less you will have to pay toward finance charges on your card balances. Included in the APR is the interest rate, service charge, loan fees and other related costs. For example, if your average daily balance is $500.00, it is multiplied by a card’s monthly periodic rate which is calculated by dividing the annual percentage rate by 12. If your card had an annual rate of 15 percent, the monthly periodic rate would be 1.25 percent. The $500 balance is multiplied by the periodic rate and yields a monthly finance charge of $6.25 which is added to the $500.00 balance.

Annual fees: Some credit card companies charge an annual fee which can be charged monthly. This is a charge to the consumer for having the card.

Grace period: Depending on the time frame included in the grace period, it helps consumers to avoid finance charges if they pay their credit card statement within the grace period and before the due date. There are some credit cards that do not have a grace period and will charge you finance fees on the day of your purchase with your card. The normal time frame for grace periods is usually from 21 to 30 days.

Balance Calculation: To understand the effect of finance charges on your balance, you need to know how it is calculated. The most common method used is the average daily balance. The average daily balance is calculated by adding each day’s balance together and then dividing the total by the number of days in a billing cycle.

Other possible methods include the previous balance method (based on the amount owed at the end of the previous billing cycle) and the adjusted balance method (where your payments are deducted before the finance charge is calculated).

Transaction Fees & Other Charges: Many card companies earn a profit when assessing fees based on how you use your card. For example, transaction fees are common for cash advances, late fees, making payments by phone or exceeding your credit limit. Other charges include bank wire transfers, purchasing entertainment tickets or even charging casino gaming chips. Some card issuers charge a monthly transaction fee whether you use the card or not.

Late fees: If you make a late or partial payment, card issuers usually will assess a late fee to your account. Late fees have gone up in recent years from $15 to as high as $29. In addition to late fees, you also risk having your interest rate increased or your card canceled.

Over-the-limit fees: Sometimes when you go over your credit card limit, the card issuer will let the charge go through because they know there will be a fee assessed to your account due to you going over your credit limit. The amount usually assessed is a whopping $39 and the issuer may go so far as to raise your interest rate along with the penalty fee. It pays to stay within your credit limit or if you know you may go over because of some unforeseen purchase or emergency, call your credit card company and request a credit limit increase.

You’ve Been Pre-approved Offers: Everyone cannot qualify for every card presented to them. This is the case even with the pre-approved offers that you receive in the mail. Although, the advertisement states you’re receiving it because of your creditworthiness, you will still have to meet the credit card issuer’s credit requirements to obtain the card.

Keep in mind that your financial situation may have changed since the time the creditor purchased your name from one of the three credit reporting agency as someone with a good credit rating. Because of this, by the time you apply for the credit card you may be denied because of your credit rating at the time.

Additionally, some of the pre-approved offers are not as good as they seem since the card issuers have started raising the amount of interest instead of the zero percent interest, they have gone from 1.99 percent to as high as 8.99 percent plus transaction fees in case you want to transfer a balance.

The bottom line is not to focus so much on the large print from the card issuer welcoming you to the fold because you’ve been pre-approved, but to also consider that owning a credit card also comes with understanding the small print and how it will effect your financial decisions as well as your financial goals.

Get more information on your credit at my credit store. If you need credit tips and advice sign up for my credit newsletter and get a free e-book on Credit Myths.

Janice_Willingham