Credit Cards
by: Montana Legal Services Association (MLSA)
What are Credit Cards?
A credit card is a loan. It is known as "revolving credit" because it allows you to make a minimum payment instead of paying off the entire balance at the end of the month.
Banks make money by charging interest on the balance. This is called the APR, or Annual Percentage Rate. They also get money from fees and other charges.
Why Credit Cards Can Cause Problems
Interest rates can change. "Fixed rates" for credit cards only leans banks have to give you 15 days notice before raising the rate.
There are fees for every possible transaction or mistake you could make. These include late fees, balance transfer fees, over-limit fees, cash advance fees. The charges are endless.
Credit cards make it easy to buy things you really can't afford. With high limits and deceptive interest rates, you can easily get in over your head in debt.
The Minimum Payment Puzzle
Let's say you have a credit card balance of $500 (low, by most standards) and an APR of 18%. The minimum payment, as calculated at 2.5% of your balance, would be $12.50.
If you paid $12.50, it would take you 7 years and over $365 in interest to pay off your debt! If you paid $50 dollars instead, you would pay off your debt in only 11 months, with about $46 in interest charges.
|
Minimum Payment |
10% of Balance |
| Time to Pay Off |
84 Months |
11 Months |
| Total Interest Paid |
$365 |
$46 |
What would you rather pay? $365 or $46?
That seems like a no-brainer. But it's easy to overlook when companies don't tell you how long it takes to pay off.
ALWAYS PAY MORE THAN THE MINIMUM!
Fees Explained
One of the most confusing problems with credit cards are the fees. It's important to know about the many different fees so that you can avoid them completely.
Late Fee: Usually between $25-50. Sometimes a lost piece of mail will result in this fee, which then adds on finance charges and possibly other fees. To avoid, pay early and online, or call to confirm your check has arrived and been credited.
Over-limit Fee: This fee can also be charged if a late fee is billed to your card. Keep accurate records of your charges, and check your available credit by phoning or checking online before making purchases.
Cash Advance: If you use an ATM to snag some cash against your credit card account, you may be asking for some big charges. In addition to the ATM fee, companies usually charge 3% of the amount advanced. Also, interest on cash advances can be much higher than for other purchases. Avoid these at all costs.
Minimum Finance Fee: Some companies will sneak in a minimum finance fee or maintenance fee. If you notice it on your statement, call customer service to get all the information and possibly switch to a new card carrier.
Annual Fee: Some credit cards charge annual fees. Be careful, they add to your balance. Some are very high. If your credit is poor, start with a secured card instead.
Credit Card Alternatives
Debit Cards: Takes money directly out of your checking account. Sometimes allows for overdraft protection
Pre-paid Credit Cards: Only allows you to spend a set amount. Once it's gone you have to reload the account.
Pay in Cash: Pay for everything in cash. If you need to make an online or mail order purchase, use PayPal or Bill Me Later.
Credit Union: If you need a loan, try your local credit union. They are usually more flexible and willing to work with you.
Online Resources
Credit Card Glossary
http://tools.creditcardflyers.com/creditcard-terms.php
Montana Consumer Credit Counseling
http://www.cccsmt.org/
Credit Card Pay-off Calculator
http://www.bankrate.com/brm/calc/creditcardpay.asp
Federal Reserve Guide on Credit Cards
http://www.federalreserve.gov/Pubs/shop/
Credit Card Ratings and Guides
http://www.cardratings.com/
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