Credit CardsPersonal Finance
Credit cards are revolving loans which build debt on a transactional basis and incur interest on a monthly basis. They make access to credit extremely easy, especially if you’re in a situation where you immediately need additional financing. This is not their only benefit. Unlike cash, if you lose a credit card you can report it lost and stolen. You can quickly cut off the loss of funds and contest charges, just like a debit card. Cash simply disappears.
Researching and Selecting Your Credit Card
Credit cards are loans. Just like any loan, a wise person will compare sources before selecting financing. This research is essential, as it reduces your lending expenses and the debt obligations which accompany them. Your primary source of information is card providers, but be sure you are comparing multiple lenders. You may be able to find preferable credit card terms from a bank, credit union, or retail source. Be sure to read user and commercial reviews, as well as non-profit ratings for credit cards.
Your first concern is the differences in interest rates and charges between multiple card offers. Interest rate offers you will receive are directly correlated to your personal credit score. The better your credit score, the better the terms of the credit card options. A high credit score with a long credit history will result in a low annual percentage rate. You will have a higher rate quote if you have low credit scores, low history, or no history. You can find rate estimates from many of the same sources you use for reviews, but remember that you should always contact the card provider for accurate quotes. You should never be afraid to attempt to negotiate a lower rate. The worst they can say is no.
If your credit history is really bad, your credit card options may require collateral. Collateral backed cards are also known as secured cards. If you abandon paying your credit card bills, they will withdraw funds from the account where your collateral is held. Note that you will still be required to pay monthly credit card bills, and failure to pay may have negative ramifications.
Your selection is based on your habits. If you travel a lot, you may want a card which rewards frequent flyer miles. If you use certain retail chains, cards which rewards discounts or deals may be preferred. There is a warning involved: you should never ignore more important factors in exchange for other benefits. Your primary goal with credit cards is to avoid mountains of debt, whether you get frequent flyer miles or a chain store discount is a secondary concern.
Charges and Fees
The charge or fee structure for credit cards features a variety of factors you should be aware of. Ignoring these factors will result in higher rates and faster-accumulating debts. These factors split into your Annual Fee, Annual Percentage Rate (Fixed or Variable), Finance Charge, Late Fees, Over Limit Fees, and other potential charges. Some of these are automatic, others are based on your behavior.
Annual fees are charged every year, regardless of the balance on the card. They are avoidable. If you chose a fee-free card, you won’t be forced to pay an annual fee. The company might be open to allowing negotiation on the annual fee, or even its complete elimination. It never hurts to ask.
Your annual percentage rate, or APR, is the annualized percentage rate which stands as your interest rate. Your APR comes in introductory, fixed, or variable. An introductory rate is initially paid for a short period of time. This attracts people to the card and will be quoted often, loudly, and in bold letters. This is not your permanent rate, and usually won’t even say introductory until the fine print (which you should always read). If it is not directly stated, you will additionally find the length of time the introductory rate lasts in the fine print.
A variable rate credit card is based on a central bank index interest rate (Prime Rate, London Inter-Bank Offered Rate, or T-Bill) plus a set percentage frequently called the “margin”. These are then multiplied based on your credit score, and your payment rate is created. The precise rate index used for your variable rate, and the added percentage rate, must legally be disclosed before you sign up for the card. The important thing you should note is that the rate is subject to change as the index basis changes and the change will be multiplied by the equation used to calculate your actual payment rate. There might be a restriction placed on the lower and higher limits of your card, or you may ask if one can be established. If your card comes with no limit, you should expect them to say no.
A fixed rate credit card has an interest rate which does not adjust according to an index. The rate you will pay is static and known in advance of the card’s use. This does not mean that the rate is permanently unchanging. Fixed rates can be increased based on consumer behavior, but notification is required according to the 1968 “Truth in Lending Act”. You must be notified at least 15 days in advance of a rate increase. Note: this means your rate can change within the same month. Some companies will give you a full 30 days of notice.
A finance charge is a charge incurred for debts related to the card. This includes both your interest fees and any cash advance fees. These fees are based entirely on your behavior, you incur these fees if you carry a balance from one month to another month. The best way to avoid finance charges is to pay down your balance every single month. This is a requirement for finance charge free credit cards. Other cards will let you carry the balance, but you will be forced to pay interest charges. These cards are known as “revolving cards”.
Late fees are incurred whenever you fail to pay within the specified period of time. You may incur an interest rate increase by being repeatedly late to fulfill payments and credit obligations. You will eventually be reported for delinquency if you fail to pay your credit card bills, or forwarded to collections. Both events negatively impact your credit report.
Over-Limit fees are fees charged for expenses exceeding the credit limit. Some cards will automatically decline expenses which bring you beyond the limit. Other cards will allow you to exceed the limit but charge you additional money for failing to properly anticipate your financial limitations. Your credit limit is partially based on your income. Credit cards often have a limit of a few thousand, but many cards offer higher credit limits to high-income earners. If you earn six figures or millions, you may be able to acquire a silver, gold, platinum, or black card with substantially higher limits than typical credit cards.
Credit card providers can calculate your balance in three ways, each having different effects on your finance charges. Knowing their differences will help you pick your credit card provider, reduce your total debt owed, and reduce your interest costs. Credit providers use one of three methods to determine your balance: Adjusted Balance, Average Daily Balance, and Previous Balance. Note that average daily balance comes in single or double cycle format.
Adjusted Balance is the most favorable method for card providers to calculate your obligations and finance charges. Credit Card providers using this method subtract payments and credits during the active billing cycle from your balance. New purchases are not added, resulting in an artificially low balance which reduces your derived obligations. The calculated result is multiplied according to your interest rate for your total monthly obligation.
Average daily balance is the second method of balance and finance charge calculation. This technique comes in single or double cycle, depending on the amount of months involved. A single cycle adds your daily balance, subtracts payments, subtracts credits, and then divides the result by the amount of days in the month. The calculated result is multiplied according to your interest rate for your total monthly obligation. The double cycle variation uses the same method, but combines the daily averages for the current and previous month. The final result sums both months and is multiplied by your monthly rate. Double cycle average daily balance results in a higher finance charge, and a solid reason to always pay your bill off each month. It should be noted that both methods should be your least preferred options for balance calculation.
The third commonly used option is the previous balance method. Previous balance calculation methods are less favorable than adjusted balance credit cards, but more favorable than average daily balance credit cards. Payments and credits made during the current billing period are not subtracted from your balance, nor are new transactions added to your balance. Your previous month’s balance is simply multiplied by the interest rate, which displays your new finance charge.
Handling Charges and Charging Errors
Credit card companies finance hundreds of millions of people internationally, handling billions of transactions daily. Occasionally they get a few transactions incorrect. If you have the misfortune to be one of them, you will need to know how to correct these issues.
You’ll begin by reviewing your charges and statements on regular basis. Once a week is a wise idea if you have online billing. Pick a specific low stress time to review your charges and bank statements. Be sure all transactions are legitimate and can easily or readily be tied to your personal expenses. Make a list of any transactions which are not, and prepare to contact your credit card company to contest charges if necessary. If you’re reporting an error, include all the information related to the transactions you are contesting. This means your full name, account number, transaction dates, charge amounts, and charge recipients.
Note that as an American Consumer, you are protected by the 1974 Fair Credit Billing Act. This federal level American law gives consumers protection against false billing claims or reports. This act defines the process of declaring erroneous and fraudulent charges, as well as how creditors may react to claims of these charges. Consumers can declare charges as unauthorized, erroneous, or fraudulent. They must submit their claims on errors within a 60 day period in writing. If the creditor receives the report they must indicate receiving it within 30 days’ time. You can ensure the credit card company has received the report by sending it via GPS tracked mail or requiring a delivery notification. They must investigate the error within 90 days. Creditors may not charge consumers any fees or expenses related to the declared transaction while the investigation is active. They cannot report late or delinquent charges. They cannot refer the borrower to credit reporting or collection agencies and cannot disable their account. Otherwise, business between the lender and the borrower continues as normal.
If the transactions are declared erroneous or fraudulent by the investigation, any charges associated must be waived by the creditor. Any previous charges paid must be returned to the lender or their account. This includes late or financing fees charged. If charges are legitimate, all associated fees and expenses must be paid in full.
Avoiding and Clearing Debt
Credit cards have many disadvantages which are primarily tied to your behavior. The downside to their massive flexibility is their potential to quickly build debt due to the easy accessibility of credit. Fees only help to increase your debts. You should be aware of all fees associated with your credit card, both theoretical and charged. Keeping track of your annual fees and finance charges will help you behave in relation to your credit card expenditures and gain a realistic view of your spending. View your expenses in relation to the fees and future potential interest costs. Use the same time period you review bills for errors to make a mental and physical record of your spending habits and debt level.
Amongst debt classes, credit card annual percentage rate are among the highest, with a few exceptions (such as payday loans). You should always focus on the annual percentage rate of the credit card you acquire. Seeking a lower annual percentage rate is substantially more important in reducing your long term costs. Beware that credit card companies can increase your interest rate (and APR) under virtually any circumstance with 15 days of warning, but most commonly increase rates after late or missed payments. You should pay off each credit card balance as quickly as possible to avoid increases in your interest rate. Many companies increase rates due to other debts not remotely associated with the credit card. You must remain financially disciplined in any area of debt that affects your credit report.
Keep a copy of all your text bills. A great way to maintain them is by scanning them into your computer and creating a backup on an external hard drive. This will allow you to comfortably maintain bills for years, and keep a record of your debts and obligations. You will also gain a substantial record of previous charges and bills in case you are erroneously or fraudulently charged. Keeping another digital record of receipts from credit card based transactions is another effective tactic.
Ultimately, your debt will be controlled by the method and frequency of your card’s usage versus the rate you pay your bills. You can pay your bills in one of three ways: paying only the minimum payment, paying off the interest rate plus some principal, and paying your entire bill each month. The minimum payment is always a trap. Interest rates always exceed the smallest payment required by substantial amounts. You’re effectively throwing money in the trash, and your balance will rise faster than the minimum payment eliminates debt principal. Avoid credit card liabilities by paying higher amounts than the interest rate, plus some principal on your monthly balance. You will slowly reduce your obligations over the long term. The best way to avoid debt is completely paying your balance every month so you don’t incur any interest at all.
Your payment behavior is otherwise tied to your spending and card usage. You should only use your credit card in situations where paying in cash or accessing an ATM is an immediate impossibility. But don’t use your card for withdrawing money. You should never use your card for anything other than a purchase transaction. The interest rate on cash advance and credit card check transactions are always higher than normal credit card dealings. Those trades only increase your debt obligations.
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