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10 Things Everyone Should Know About Credit Cards
If you are an average U.S. citizen, you have eight credit cards and about $7,000 in credit card debt. If you are trying to take control of your finances and reduce your worries about money you need to understand the dirty secrets and tricks credit card companies employ to make profits at your cost and sanity. Here are 10 things you should know about debt that could help you avoid the pitfalls and plan ahead on how to deal with your expenses in the best possible manner.
10) Minimum Payments = Decades of Debt
In the past, credit card companies charged a minimum payment of 5 percent out of the outstanding balance. Now they charge only 2 percent of the outstanding since they have discovered that people were spending less when they knew they had to pay at least 5 percent of what they owed. Additionally, the less they make you pay each month, the more you owe them, and the greater the amount they collect as interest. If you pay the credit card issuer just the 2 percent minimum required, you will be in debt for decades.
9) Credit Score Affects APR
A single late payment to any creditor will increase your annual percentage rate (APR). This means you need to watch your mortgage, car payment, cell phone bill, and any other payments since even a single delay will lead to a hike in your APR. The Universal Default Clause can raise your credit card APR to 30 percent even if you have paid the card issuer in time.
8) No Limit on Late Charges
Another area in which credit card issuers can easily make a lot is the late charges. There is no limit on how much they can charge you for a late payment – some card issuers now charge $36 and this is expected to go up to $60 within the year. Moreover, the late charge is in addition to the high APR, in effect a double penalty, even if your payment is only an hour late.
7) No Federal Limits on Interest Rates
The Federal Government does not limit the interest rates charged by credit card issuers. So, most of them operate out of states that have weak or no usury laws. This is the reason for APRs of as much as 34.99 percent.
6) Interest is Charged Twice in the Same Month
Some credit card issuers charge interest twice in the same month. This happens if you have paid your dues in one month in full, but were unable to pay your dues the next month. The credit card issuer can charge interest twice in the second month.
5) Shorter Grace Period
Years ago credit card issuers provided users with a grace period of 25 days after making the purchase to make the payment, most card issuers have now reduced this to 20 days. Some card issuers do not provide a grace period at all, essentially calculating interest from the moment you use the card.
4) Cash Advances Cost More
If you use your credit card for a cash advance, you will be charged a higher APR and you could also be charged a transaction fee of around 2.5 percent. Since the transaction fee is not a finance charge, even those cards that advertise “no finance charges” can charge you for the transaction.
3) Change the APR
The credit card issuer has the right to change the APR at any time as long as it gives you a 15 days’ notice. Besides, many of the benefits the card provides such as purchase protection, travel discounts, and lifetime warranty coverage might end when the introductory rate period of the card ends. You should also find out what the APR will be once the introductory rate ends before you sign up for and use a credit card. If the card has a variable APR, you need to be careful about using it unless you can pay it off in full each month.
2) The “Deadbeats”
Credit card issuers have their own vocabulary for the various types of card users. Those who pay their dues in full each month are called deadbeats and the issuers really do not care for them since the profits they generate are minimal. However, the revolvers – those who pay only the minimum due each month – are sought after by card issuers since they contribute 90 percent of the issuer’s profits. Issuers prefer the irresponsible over the responsible any day of the week.
1) Ask for and Obtain a Better Deal
Most of the fees charged by the credit card company are discretionary and not binding or a necessary cost of doing business. This means you can ask the card issuer to reduce the APR, do away with the annual fee, and provide a longer grace period. Most card issuers will oblige if you ask and say that you are willing to cancel the card or not continue to use them if they do not acquiesce to your simple demands.
The best way to use credit cards is for convenience, not credit. If you pay your dues in full each month and have a couple of cards with you, you will be able to bargain with the issuer for better terms and take advantage of the benefits credit cards offer.
Photo Credit: sovietmole