Credit Cards, And How To Be A Well-Informed Consumer by Elisea Frishberg

Credit Cards, And How To Be A Well-Informed Consumer

There are many kinds of credit, but this article is specifically about credit cards, and how to be a well-informed consumer, when and if you decide to use them.

Clearly, borrowing money to get the things we want has become a way of life for many Americans. In fact, American consumers borrow more money than anybody else on the planet.

Nobody can deny there are some terrific reasons for using credit when you can get it. Credit makes it possible to buy and enjoy expensive items while you’re still paying for them. Borrowing money provides convenience when you’re traveling and purchasing by mail or on the Internet, and it makes it easy to handle financial emergencies.

That is the good news about credit. But there’s another side to it also. Purchases cost more because you’re paying interest and fees when you use credit. Many consumers are tempted to overspend, and may have a false sense of security when credit is available too.

It’s nice to have money available when you need it, but using credit also risks getting a bad credit rating, and no matter what, you are committing future earnings that you may want and need later for more important things than what you are tempted to buy.

When you are not keeping yourself awake and conscious, you can be tempted into a shopping frenzy, purchase goods and services that you don’t need, and generally live beyond your income.

Consumers who are too eager to borrow money often don’t pay attention and the results can be very punishing. If you’re not careful you could end up paying excessively high interest; you may end up with alone packed with a lot of unnecessary extras; and your lender may misrepresent or mislead you with difficult to read information about critical details of your loan.

This article is about knowing what you’re doing, knowing how to choose your lender, understanding the deal you’re getting and generally using your brains to get a better deal.

Sometimes a better deal means saying no to a lender, shopping around, and even deciding not to use the credit at all, and wait until you can actually afford whatever it is you are dying to buy.

Normally, in this kind of magazine, we attempt to make our articles as entertaining as possible, but this subject, helping our readers to make good decisions about how they use credit, doesn’t lend itself to writing and entertaining article. Remember, you are a person dealing with a large bank. You are not playing on a level field, unless you personally take the trouble to understand exactly what you are doing. All you really need is a little confidence.

  • For the most part, that bank doesn’t care much about you and in many cases the deal they offer you is full of fine print designed to make it difficult for you to shop for the best terms.

  • The lender does deals like the one you are contemplating hundreds or even thousands of times a day. You may only do this once or twice in your life.

  • The lender has a team of lawyers to write complicated contract terms they can use thousands of times. They know very well that you can’t spend a lot of money paying for professional advice to evaluate your loan. You must learn to defend yourself.

One of the most boring websites you’ll ever find, and one that you should take the trouble to read if you want to use credit is the website of the Federal Trade Commission. You will find it at www.FTC.gov.

In a free country, your job is to watch out for yourself, and make sure you are an informed consumer. Be smart, and read and understand the fine print of your loan deal, proving you are mature enough to participate in this kind of a deal.

There are a few concepts you should understand thoroughly if you’re going to use the convenience of credit. The most important thing you must do is to read the contract with your lender. It may use deceptive language, but the law requires the lender to disclose the terms, so if you take the trouble to read carefully you can understand what is being offered to you.

Important note:

You don’t have to accept the terms offered to you in the contract. You may call the lender and negotiate different terms, and you may shop around. Check with different lenders and compare deals they offer you. You will be amazed how much money you can save by holding out for the best deal you can get. Credit can be expensive, and you could retire or send your children to college on the money you can save over the course of your life by negotiating the best possible deal with your creditors.

You do not have to be intimidated by this process. Success in business requires the same strength of character, courage and confidence that it took to serve your country honorably. Remember who you are.

The following questions and answers are designed to help you understand the concepts, so you can carefully read, understand, and compare deals that are offered to you by different lenders.

How does my credit card company calculate the amount of interest I owe?

Many credit card companies calculate the interest you owe daily, based on your average daily account balance.  Often card companies charge one interest rate for purchases and different interest rates if you use your credit card to get cash, to write a check using your credit card account, or for other transactions. If your card has a grace period, you can avoid paying interest on purchases if you pay off your balance in full by the due date each month.

How does the daily interest calculation work?

Many issuers calculate the interest you owe daily, based on the average daily balance. The interest charged daily is called the daily periodic rate. Since interest is accruing daily, not monthly, this means that if you don’t have a grace period, the sooner you pay off all or some of your balance, the less interest you will pay.

How do I know what APR applies to different types of balances? 

Annual percentage rate (APR) is a rate that has to be disclosed to you by law. It is the rate that shows the total cost of your credit annually. It includes a percentage of the principal as interest on a loan plus other costs you have to make yourself aware of including points, origination fees, and all kinds of service charges.

Your statement must show each category with a different APR and the amount of the balance that falls in each category. If your card has a grace period , the grace period usually applies only to the category of new purchases and only if you were not already carrying a balance.

How do my payments affect the amount of interest I owe?

If your card has a grace period, you can avoid paying interest on purchases if you pay off your card balance in full each month by the due date. When you pay less than the full balance but more than the minimum required, the card issuer must generally apply the amount you pay over the minimum first to the balance with the highest interest rate and any remaining portion to the other balances in descending order based on the applicable interest rate. It is generally up to the card issuer to decide to which balance it will apply the minimum amount portion of your total payment.

I got a credit card promising no interest for a purchase if I pay in full within 12 months. How does this work?

If you were told that you do not have to pay interest on the purchase if the purchase is paid in full within 12 months, your card has a deferred interest plan. It’s important to understand how deferred interest works. Otherwise, you could end up having to pay the interest you thought you were deferring.

How interest is calculated: A deferred interest plan means that you won’t have to pay any interest on the purchase if you pay it off within the specified time frame – in this case, 12 months. However, if you haven’t paid off the balance or if you are more than 60 days late in making a minimum payment before the deferred interest period ends, you will be charged interest on that balance. Usually, the interest is calculated based on the balance you owed in each month since you first made the purchase. In this case, if you don’t pay the entire balance off in 12 months, or if you are more than 60 days late in making a minimum payment, you will be charged interest for each month on the balance you owed in each of the 12 months.

Here’s what you generally need to know about deferred interest plans:

  1. You need to pay off the full balance by the end of the deferred interest period, or else you could have to pay all of the interest that you expected to be deferred. That means you would owe all of the interest back to the original date of the charge.

  2. You still need to make at least your minimum payments when they are due. If you’re more than 60 days late making your payments, you could lose the deferred interest period. Note that a single late payment could have other consequences, like late fees.

  3. Your minimum payments probably won’t be enough to pay off the entire balance by the end of the deferred interest period.

  4. If you have other balances on the card that have a higher APR than the deferred interest balance, any amount above your minimum payment will be automatically applied to the balance with the higher APR. This changes in the last two billing cycles in your deferred interest period, when any amount above your minimum payment will be applied to the deferred interest purchases.

  5. If you use the card for other purchases, you might lose your grace period on those purchases if you don’t pay off the entire card balance including the deferred interest portion at the next payment due date.

Five tips for paying off your deferred interest purchase:

  1. Know when your deferred interest period ends. The front page of your bill shows when the deferred interest period ends. Your deferred interest period might have a different end date than your regular monthly payment due date.

  2. Pay more than the minimum each month.  Your minimum payment alone usually won’t pay off your deferred interest purchase before the deferred interest period ends. Calculate how much you’ll have to pay each month to pay off the purchase on time (or early, if possible). Consider doing this before you make the purchase, so you know whether you’ll be able to pay it off in time.

  3. Ask your card company to apply anything you pay above the minimum monthly payment amount to your deferred interest balance. Your credit card company may not honor this request, but if it does, it may increase your likelihood of paying the balance in full before the end of the deferred interest period. This payment schedule changes when there are only two months left in your deferred interest period. At that point, if you pay any more than the minimum monthly payment, your card issuer must use that money to pay down your deferred interest purchases.

  4. Make your payments on time. It’s important to make your payments on time. Late payments can mean you owe all of the interest that would have been deferred.

  5. Try to pay off your deferred interest balance well before the deferred interest period ends. That way, you avoid having your payment take too long to arrive or forgetting to make that last payment. If you don’t, you will be charged interest on your purchase going back to the date you first made that purchase.

I paid off my entire bill when it was due last month and still got charged interest. How can that be?

Answer: If you’ve been carrying a balance, most card issuers will charge you interest from the time your bill was sent to you until the time your card issuer receives your payment.

Different card issuers have different rules for determining when they charge interest. In general, once a card issuer begins to charge interest it will continue to do so until it receives your payment.  This means that if you have been carrying a balance, you will be charged interest – from the time your bill was sent to you until the time your payment is received by your card issuer.

Your cardholder agreement should tell you the rules your card issuer applies. You should be able to find a copy of the agreement on your card issuer’s website, and you can request a copy from your card issuer if it is not there.

I mention this above, but it is so important I will repeat it. This is the point of this article.

You don’t have to accept the terms offered to you in the contract. You may call the lender and negotiate different terms, and you may shop around. Check with different lenders and compare deals they offer you. You will be amazed how much money you can save by holding out for the best deal you can get. Credit can be expensive, and you could retire or send your children to college on the money you can save over the course of your life by negotiating the best possible deal with your creditors.

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