Secrets
of the Credit Card Companies that Impact YOU
Those
credit card offers just keep coming. Seems there's
hardly a day goes by that your mail box is not stuffed
with some new bank offering some new credit card.
But there's a danger lurking for you also, one you may
already be painfully aware of. Over use of credit
cards is crippling the spending power of millions of
Americans. The following is the truth about what
really goes on behind the scenes at your credit card
company.
Dirty
Little Secret #1: Debt Addiction
Consumer
debt is way out of control, but the dope (I mean
"debt") pushers just keep on pushing.
The average consumer has 7 credit cards with an average
balance per card of $2500. (That's $17,500 in debt
in case you haven't done the math!) 60
million Americans charge an average of $6,000 on credit
cards every year. Sure,
there's safety in numbers, but is this the company in
which you want to belong? I don't know about you,
but I'd much rather belong to the "below
average" customer group that has less than $1000 in
TOTAL credit card debt.
Credit
card companies keep offering us new cards every week
(think of how many you have gotten in the last year!)
with higher credit limits and cash advances.
Basically, they insult our intelligence. Many
consumers are flattered when they receive their
"PRE-APPROVED PLATINUM VISA, just fill out the form
below, sign and send back" letter. We think
we're being rewarded for a job well done. The job,
of course, being able to spend money with the best of
them and pay it back better than most. Don't get
SUCKED into this mental trap!!! STOP
TRYING TO KEEP UP WITH THE JONES'. THEY'RE HEADED
FOR BANKRUPTCY ANYWAY!
Dirty
Little Secret #2: The Never Ending Balance
If
you make the minimum payment due on your average balance
of $2500 each month, your credit card won't be paid off
for over 30+ years! It's called
"amortization," or in the case of credit card
repayment, I should say "lack of
amortization." In lay people's terms, this
simply means, you have no real term set in order to pay
this back. It's open-ended, as in "NEVER
ENDING!!"
They'll
let you pay on that same balance forever if you like.
When you buy an automobile, you may finance it for five
years. You know if you never send an extra dime
but your monthly payment to that loan
company or bank you will own that car on the day
of your 60th payment. But that's not
the case with credit cards. They are
"revolving" accounts. Kind of like the
earth revolves around the sun... I guess you can say
they are like the Energizer Bunny, "THEY KEEP
GOING, AND GOING, AND GOING, AND GOING, AND
GOING..."
Dirty
Little Secret #3: The Transfer Trap
Because
banks know that credit card usage is at an all time
high, most of them are killing each other to get your
business. Many offer promotions like transferring
balances from other cards to the new card they are
offering you. If you transfer balances from other
cards, they say they will charge you a reduced rate of
interest on those portions that are transfers.
This sounds like a great deal (going from 18% to a
promotional rate of say, 9.9%); however, most of them
have a catch. For instance, if you do not charge
something on the new card each and every month, the
interest goes up to the regular rate of the card (which
is often high), or if you make one late payment, you
forego the lower promotional rate, and the rate again
goes up to the regular rate of the card. Beware of
the "Transfer Trap." All you're really
doing is transferring your agony from one company to
another, and avoiding the real solution;
finding a workable plan that will get you debt
free once and for all.
Dirty
Little Secret #4: Minimum Payment Misery
If
you keep making your minimum payment only, your balance
will rarely ever get paid off. Have you ever
noticed how, while your minimum payment due on your
credit card is $85, your balance only came down $6
dollars? WHY??? That's because we pay
un-Godly amounts of interest on credit cards. Even
the so-called "low-interest rate" credit cards
don't show their payments going toward bringing down
their balances. All they do is just require a
lower minimum payment. Sure, this might help
your monthly outgo right now, but what's it doing to get
you out of debt faster? NOTHING!
That's because the MINIMUM PAYMENT DUE ON CREDIT CARDS
ARE BASICALLY "INTEREST-ONLY" PAYMENTS,
and making the minimum payment on a credit card is a
guaranteed way to NEVER PAY IT OFF!
Suppose
you owe $2,000 on a card with 19% interest and a 2%
minimum payment. Paying just the minimum every
month, it will take you 265 months--over 22
years--to pay off the debt,
and it will cost you nearly $4,800 in interest payments.
Doubling
the amount paid each month to 4% of the balance owed
would allow you to shorten the payment time to 88 months
from 265 months--or 7 years as opposed to 22 years--and
save you about $3,680.
Dirty
Little Secret #5: Fine Print Fiasco
Example:
Your rate of 6.9% is a teaser rate. After six
months, your rate will be 21%. The Teaser, a.k.a.
introductory rate credit card has made credit card banks
and centers BILLIONS of dollars. Because so few
consumers ever read the FINE PRINT. You know,
the print that only the eyes of a 12-year-old can read
without getting a migraine? These credit cards
come with stipulations. There are too many
"catches" to name. But, I assure you,
they are there. Credit card banks don't make any
money if they are financing your debt at below Wall
Street Prime interest rates. So I leave you with
one last thought on this topic, "IF IT SOUNDS TOO
GOOD TO BE TRUE, IT PROBABLY IS."
Fight
Back by Understanding These Terms
The
key to reading your credit card statement is to
understand the terms on it. Here are explanations
of common terms:
·
Amount
due:
Some cards use this term to describe the minimum monthly
payment. This is not the total you owe on the
card.
·
Annual
percentage rate (APR):
This is the finance charge, expressed as an annual
figure, such as 21%.
·
Cash
advance:
A loan in the form of cash (as opposed to purchases of
goods or services) made through a credit card.
·
Due
date:
The date by which your payment must be received by the
company, for you to remain in good standing.
·
Finance
charge:
The interest charge on your outstanding credit card
balance.
·
Grace
period:
A period in which you can make new purchases without
paying interest. (Not all cards have a grace period.)
·
Late
fee:
A charge assessed if your payment is recorded after the
due date.
·
Minimum
monthly payment:
The smallest amount you can pay to avoid being
delinquent. Paying the minimum is the most
expensive way to handle your credit card bills.
·
Monthly
periodic rate:
A fraction of the APR (1/12), the rate at which interest
is assessed during the billing period.
·
New
Balance:
The total owed after new charges and credits have been
added up.
·
Over-credit-limit
fee:
A charge assessed if you put charges on your credit card
that exceed your approved credit limit.
·
Previous
(or outstanding) balance:
The amount you owed last month, after that month's
payments and charges were added up.
·
Transaction
fee:
A charge for making a purchase or receiving a cash
advance.
Dirty
Little Secret #6: The Cruel Cost of Cash Advances
A
cash advance is a loan billed to your credit card. You
can obtain a cash advance with your credit card at a
bank or an automated teller machine (ATM) or by using
checks linked to your credit card account.
Most cards charge a special fee when a cash advance is
taken out. The fee is based on a percentage of the
amount borrowed, usually about 2% or 3%.
Some credit cards charge a minimum cash advance fee, as
high as $5. You could get $20 in cash and be charged $5,
a fee equal to 25% of the amount you borrowed.
Most
cards do not have a grace period on cash advances. This
means you pay interest every day until you repay the
cash advance, even if you do not have an outstanding
balance from the previous statement. On some
cards, the interest rate on cash advances is higher than
the rate on purchases. Be sure you check the details on
the contract sent to you by the card issuer.
Here
is an example of charges that could be imposed for a
$200 cash advance that you pay off when the bill
arrives:
·
Cash Advance Fee = $4 (2% of $200)
·
Interest for one month = $3 (18% APR on $200)
·
Total cost for one month = $7 ($4 + $3)
In
comparison, a $200 purchase on a card with a grace
period could cost $0 if paid off promptly in full.
THE
BOTTOM LINE:
It is usually much more expensive to take out a cash
advance than to charge a purchase to your credit card.
Use cash advances only for real emergencies.
Dirty
Little Secret #7: Hidden or Unexpected Fees
Most
people look for a card that doesn't have an annual fee,
but did you know that there are other fees that can cost
you more in the long run?
·
Late
fees
Most cards charge a fee when payments arrive late, after
the due date. Some banks wait a few days before
assessing this fee, but many impose it the day after the
payment was due.
Some
companies have a set fee, such as $10 or $15, while
others charge a percentage, such as 5%, of the minimum
payment due. Just paying late fees twice in one year can
cost you more than an annual fee.
To
avoid late fees, mail your payment in plenty of time to
arrive before the due date. If you pay your bill at the
bank's branch or ATM, find out how long it will take to
process your payment. Sometimes payments made at a
branch or ATM are not
credited for a few days.
·
Over-credit-limit
fees
Most cards assess a fee if
you charge more than your credit limit. These fees are
charged each time you exceed your limit, so you could be
hit with several of them during one billing period.
Most
banks have a set fee, such as $10 or $15, while others
charge a percentage, such as 5%, of the amount you are
over your limit.
If
you charge $400 over your limit, with a 5% penalty, you
will pay a fee of $20. This is in addition to interest
charges.
·
Lost
card replacement fees
A few companies charge people whose cards have been lost
or stolen more than once or twice. These fees are
usually $5 or $10.
Pay
Attention! Special
fees can cost you a lot, so keep track of when you mail
your payments and how much credit you have left.
Dirty
Little Secret #8: Sneaky Ways They Calculating
Interest
Most
banks use an "average daily balance" method to
calculate interest.
Average
Daily Balance Method
1.
Every day, the bank adds your charges and payments to
learn what you owed it that day. It adds these totals
and divides that figure by the number of days in the
month, to determine your average daily balance.
2.
Then the bank divides its annual interest rate by 12
(the number of months in the year) to get a
"monthly periodic interest rate." For example,
an 18% interest rate divided by 12 equals a monthly rate
of 1.5%.
3.
The bank multiplies your average daily balance by the
monthly periodic interest rate, to obtain the finance
charge for that month.
In
calculating your daily balance, most banks include
charges made during the month ("average daily
balance, including new purchases"). Others exclude
those charges until the next statement ("average
daily balance, excluding new purchases"), which is
to your benefit.
Dirty
Little Secret #9: Two-Cycle Billing Method
Some
banks retroactively eliminate the grace period by using
a "two-cycle billing method." If you don't pay
the entire balance, the finance charge is based on the
sum of the average daily balances for both the previous
and current months. (Some banks exclude new purchases
from the finance charge calculation of their two-cycle
billing method.)
You
are only charged for a two-month time period in the
first month you don't pay all charges. People who
sometimes pay in full and sometimes leave a balance will
pay about the same amount under the two-cycle method as
with a "no grace period" card.
THE
BOTTOM LINE:
You should know how your bank calculates finance
charges.
