Credit Cards: The Tools of Your Financial Destruction
Seriously, though, a credit card can be a valuable financial tool. It’s convenient to use, especially when ordering through the mail, or off the Internet, and it gives you the power to buy the things you want.
Consider this – – if your credit card charges you an 18% Annual Percentage Rate, and your balance is a low $1,000, which you pay $50 on every month, you’re going to celebrate nearly five birthdays with that credit card debt!
Keep in mind this is the cost for just one credit card account. Most people have more cards than just one; about seven accounts on the average, and with even higher balances!
Financial experts say the majority of American households are an estimated $10,000 in credit card debt. Let’s take that ten thousand dollar charge debt and times it by an 18% Annual Percentage Rate to see what we come up with:
$10,000 X 18% APR = Approximately 90 monthly payments of $200 bucks each.
Now, let’s compare it with a lower interest credit card:
$10,000 X 10% APR = Approximately 69 monthly payments of $200 bucks each.
The latter card balance would be paid off nearly two years earlier! What a remarkable difference a lower interest rate makes!
Note – The “APR”, or, “Annual Percentage Rate” is the interest rate that you are charged every year. On the other hand, the “Periodic Rate” is the rate of interest you are charged each billing period. The periodic rate is usually calculated by dividing the credit card’s APR by 12. For example, a 12% APR would break down to a periodic rate of 1%. If your card has different rates for different types of transactions, such as purchases and cash advances, then different periodic rates will apply to those individual balances.
An added note here- be careful not to exceed your credit limit! Late payments can mean a rise in your interest rate!
2. Does this credit card offer a standard grace period?
The grace period is the time between the date of your purchase and the date that the interest charge begins. You should choose a credit card that has a standard 25-day grace period. Then, you can pay off your balance in full without the added expense of interest charges. Some cards don’t offer a grace period, and you get charged from Day 1 – -from the day you made the purchase! This is a bad deal! Ditch this type of card and shop around for a better deal you can live with!
3. Do I pay an annual fee for the privilege of carrying this card?
Some credit card issuers charge $25 or more, while others don’t charge you a fee. There are literally hundreds of credit card issuers out there, so why would you want to keep a card that you have to pay the company to use? As long as your credit rating is good, you don’t have to accept a credit card that tacks on this extra fee every year.
4. Does this credit card charge me a transaction fee every time I use the card at the ATM?
Some credit card companies don’t charge you a fee if you use the card at your own bank. A usage fee of two bucks or more is normally charged otherwise.
5. How Much Am I Charged On Cash Advances?
Be ye warned that cash advance transactions are beneficial for the credit card issuer, and rarely beneficial for you! It is often common practice for credit card issuers to charge a transaction fee on top of finance charges that start on the very first day you borrowed the money!
Choose a credit card that offers the lowest fee for cash advance transactions. Typically, you can expect to pay around 2%.
6. What kind of billing cycle does this credit card issuer use?
If the company uses a “Two-Cycle Billing” method, and you carry a balance from one month to the next, then the interest becomes retroactive clear back to the date you made the charge! Your grace period is eliminated!
Shop around for a credit card that uses the “Average Daily Balance Method.” By using this method, you will be given credit for your payment from the first day the company receives it, and, the interest on your balance will be computed on your average balance from just one month.
Unchaining Yourself From Credit Card Debt
Now that you have completed your Credit Card Audit, your next goal is to pay those credit card accounts off, and save yourself hundreds, or even thousands of dollars!
Pay A Lower Interest Rate
1. If you have very good credit, don’t settle for less than you deserve. If you are paying more than 12 – 15% interest on your credit cards, then you’re paying too much. Think about it. With the prime interest rate at 9 or 10%, lenders that charge 18% or more interest per year on credit card balances have their hands on your checkbook! You should be able to obtain a credit card rate for between 10% and 12%.
Be sure to check the “Valuable Resources” section of this book to find out where you can find a list of the lowest credit card rates.
Warning: Someone Doesn’t Want You To See This!
I’ll let you in on a little secret that your credit card companies probably do not want you to know:
Do you know what state the lowest-rate credit cards are known to come from? Arkansas! Yes, Arkansas, the home of Bill Clinton, our 42nd United States president.
Pay Off Higher Interest Cards
2. If you can get a lower interest credit card, you might be able to utilize their cash advance option to your benefit. I warned you earlier about the cons of taking cash advantages, but here’s a “pro” that can benefit your wallet!
If you can take a cash advance at a lower interest than some or all of your higher interest credit cards, then you can pay off those balances and save yourself tons of interest debt! Be cautious, though. Some credit cards charge a high fee for transferred balances, so be sure the transaction would be a good deal for you. Make sure you can pay off the balance before a higher rate takes effect too!
Use Your Savings Wisely
3. You might think about using just part of your savings to pay off some of your debt. If you’re getting paid 2 or 3 % interest on your savings account, while you’re paying – let’s say – even a low annual rate of 12% on a credit card debt, think about how much money you could save if you paid that charge debt off now! Just be careful to leave enough savings in your account in case you need that money for an emergency.
Ever Considered A Home Equity Loan?
4. If you don’t have enough savings to pay off all or part of your consumer debt, then you have another option, and that’s a home equity loan. Interest rates on home equity loans are much lower than most credit cards, and come tax time, you can deduct the home equity loan interest from your taxes!
“No Fee” Credit Cards
5. Look for “no fee” credit cards when you’re shopping around for the best deal. Why should you pay $25 or more each year for the privilege of carrying a lender’s card? That’s nonsense! They should be paying you! But since that will never happen, you’ll have to be content with a card that at least doesn’t charge you a fee for having it.
Consolidation Might Be Your Answer!
6. You might be able to either transfer a low balance, high-interest credit card balance to another low-interest credit card, as I said previously. Or, if your debts are really high, you might consider combining the total balances and taking out a mortgage loan or a home equity loan to pay the debts off. You’ll earn a Goliath – sized savings amount between paying 18% interest on credit cards, and an estimated 8% on your mortgage loan amount.
Consolidation is only half the battle plan, though, as you still have to plan on paying off the new loan.
Pay Them Off One at a Time
7. Start this process by sitting down and making a list of all your credit card debts. Mark down each card name along with its corresponding balance and the interest rate that lender charges. Now, you will first want to look for the card that has the highest interest rate. This is the card that you’ll want to work on paying off first.
Then, simply pay as much above-and-beyond the minimum payment every month on that account until the balance is completely paid off. Then, go back to your list of credit card balances and find the next-highest interest rate. Use the amount of the monthly payment from the first card you paid off and add it to the minimum payment amount of your second card. Apply this total amount towards the second card balance. You will probably be shocked at the speed in which your credit cards will be paid off! Plus, you will probably be even more surprised to see how much you’ll save by paying these debts off early!
You may even choose to put an income tax refund, a bonus from work, or any other additional income towards the balance to help whittle it down even faster! Repeat this process and go down your list until you have all of your accounts completely paid off!
Start with that balance and pay as much on it as you possible can. Then, when it’s paid off, you go to the next highest card which would be the 18% one. The minimum payment is around 80 bucks a month also, but you apply the payment of 80 bucks that you were paying on the first credit card balance, and apply it to the second.
So you will pay 160 bucks every month on the second highest card which will be like making two monthly payments instead of one. So, that account will be paid off in essentially half the time it would normally take! See how this works?
Keep going and you will save an incredible amount of cold, hard cash in interest payments. And, at the end, you will be free of credit card debt!
Tips on Staying Debt Free
Once you get yourself out of credit card debt, there are some tips you can use to help stay debt-free and save interest charges too:
1. If you do use a credit card, pay off the total balance by the due date.
2. If you decide to keep credit cards for emergency purposes, then keep only one.
3. Keep track of the exact amounts you spend on your credit card.
4. Don’t make your payments late! You’ll lose money in two ways if you do: The credit card issuer will sock a late fee of around $25 on your account for every month your payment is late, plus, you’ll run the risk of losing your low interest rate.
5. Want to purchase a bigger ticket items? Wait until you have the money or use a “Same – As – Cash” payment plan if the seller offers one.
Don’t Be A Victim of Credit Card Fraud
Credit card fraud is a crime that is committed every day! Thieves use your name and your social security number to obtain everything from cell phone service, to additional credit cards and credit lines!
Don’t let yourself become another victim! Protect yourself and your family by following these simple guidelines:
Do:
Use a copying machine to duplicate each and every one of your credit cards, front and back. Place these copies in a safe place – – not in your wallet or purse – – along with the phone number and address of each credit card company, and, the names and numbers of the three national credit reporting agencies.
If any of your credit cards are lost or stolen, you should immediately call these companies to place a “Fraud Alert” on your name and social security number. The alert means that any company that checks your credit will know your information was stolen.
Here are the toll-free numbers for the 3 national credit-reporting agencies:
Equifax Fraud Alert Line: 1-800-525-6285
Experian (formerly TRW): 1-888-397-3742
Trans Union Fraud Victim Assistance: 1-800-680-7289
You will also need to notify each one of your credit card companies immediately to report/cancel your lost or stolen credit card(s).
File a police report immediately in the jurisdiction where your card(s) was/were stolen too!
Added note- the number for the Social Security Administration Office of the Inspector General Fraud Hot Line is 1-800-269-0271. You should notify this office if your social security card is stolen.
Sign your credit cards as soon as you get them.
Save charge slips and reconcile them with your monthly billing statements.
Report any problematic charges to the credit card company right away.
Notify card companies in advance if you change your address.
Don’t:
Lend your card(s) to anyone.
Leave your cards in an unsecured place.
Sign a blank receipt.
Give out your account number over the phone unless you’re making the call to a company you know is reputable. If you have questions about a company, check it out with your local consumer protection office or Better Business Bureau.
Disputing Your Bill
When you reconcile your monthly credit card statements, and you find a charge that you don’t believe you made, there is a procedure to assist you in disputing the charge. Generally, you must give the exact details of your complaint in written form to the lending company.
The Federal Truth-In-Lending Act requires the lender to then investigate the disputed charge(s) and let you know what their findings are. If the vendor cannot prove you made the purchase, the charge will be removed.
As long as the charge is in dispute, you don’t have to pay that portion of your bill. You do, however, have to continue paying any other amounts you may have on the same card.
A Note About “Credit Repair” Companies
You probably have seen numerous advertisements for “credit repair” companies. You may even have considered checking out one of these companies to help get you out of debt. These companies typically offer services like debt counseling or debt reorganization plans.
Before you consider turning your finances over to an outsider, it would be wise to investigate the company you choose thoroughly. Be sure you understand what services the business provides and what the costs will be. Also, make sure you check them out with the Better Business Bureau and your local consumer protection office before you do any business with them!
