Credit Card Basics
If you want to avoid credit card debt you have to understand what credit is.
In case you haven’t figured it out yet, the credit system works against you, unless you are prepared.
And since it is an unfair game, you need to know the rules. Once you know how credit works, how compound interest works, you can start using it to your advantage, instead of being a victim of it.
Let’s talk about ‘pre-approved’ credit card offers that are mailed to consumers. These offers usually carry a “low introductory” rate which is “fixed” for a set number of months. But, once you read the fine print, you find out that in reality that “fixed” rate can change at any time, and for any reason. What follows was taken from an offer I recently received from Chase Bank.
‘Rates, Fees and terms may change: We reserve the right to change the terms of your account (including the APRs) at any time, for any reason, in addition to APR increases that may occur for failure to comply with the terms of your account’
So you may be thinking you are getting a great deal, when in reality they can change the rules whenever they want.
Unfortunately, you cannot beat the system. They write the rules to their advantage and we must comply. Every year, credit card companies, banks and financial institutions spend millions and millions of dollars lobbying Congress to make sure laws are passed that benefit them, not consumers.
You simply cannot compete.
The good news is that you don’t need to beat the system; you just need to understand it.
Pre-approved offers are mailed to anyone on a list that a credit card company purchases (usually from the Credit Bureaus), and does not mean that you will definitely get a credit card. They are inviting you to apply, but they are targeting their mailings towards consumers who are more likely to respond and qualify for a card.
If you do not want to receive any more offers, you can call (1 888 5OPT OUT / 1 888 567 8688) or online at www.optoutprescreen.com to request that Credit Bureaus not include your file in any pre-approved / promotional lists. I encourage you to opt-out, if (for no other reason) to minimize the chances of identity theft.
I recommend doing it online, but if you’re oldschool and prefer to contact the Bureaus directly, write to the following addresses and tell them you want to opt-out of pre-approval screening:
P O Box 7401243 – Atlanta, GA 30374-0123 (800)556-4711
Experian Consumer Opt Out
701 Experian Parkway – Allen, TX 75013 (800)353-0809
Attn: Marketing Opt Out – PO Box 97328 – Jackson, MS 39288-7328
There are several more practices that have become more common in the last few years.
One of them is the “Grace Period”, which is the number of days you have to repay your purchase before you are charged interest. Many cards have reduced the grace period from 30 days down to 21 days. With a 21-day grace period you have less time to pay for your purchases in full, and a better chance of paying interest than before. And, if the amount is not paid in full, interest is charged from the date of purchase, not the day you started financing it.
Another practice is the addition of the over-the-limit fee. Many consumers would expect their credit card to be declined if a transaction would put the card over their credit limit. But, increasingly, credit card companies are allowing these transactions to go through, then slapping consumers with an over- the-limit fee of $20, $25 or more.
Late fees are escalating too, adding $30 to $50 to your credit card bill. Not to mention that your interest rate skyrockets. I personally know someone in New York who sent his payment in late, and his interest rate went from 9% to 29% the following month. This is very common.
There is also the Foreign Transaction fee that you get hit with when making purchased or withdrawing your money from an ATM outside of the States. The amounts vary depending on the transaction amounts, but they do add up. Keep that in mind next time you travel. I actually got a card from Chase that has no Foreign Transaction Fees because I travel frequently.
Simply withdrawing money from an ATM that doesn’t belong to the bank means you are going to be hit with two fees. One fee that is charged by the bank that owns the ATM, and another fee that is charged by your bank (not all banks will charge this fee, but most will). Withdrawing $20 from another bank’s ATM could result in $4 to $6 in fees. How many times a year do you withdraw money from other bank’s ATMs?
There are way too many fees to list here, but you get the idea. Are you asking yourself what you can do to protect yourself? There are a number of things you can do.
First, you need to check your credit card statements every month. Believe it or not, most people do not check their statements. Check not only your credit card statements but also your checking account and your savings account statements. Look for any errors.
Look for fees, and see if they are correct. If you see any over-the-limit or late fees, call the company and ask (politely) if they can waive them. They will usually waive them, but if you are late again or over the limit again, they may not do it a second time.
Be very careful when mailing your payments. Send them at least 10 days before the due date to avoid late fees. Or set it up so the balance is deducted from your checking or savings account automatically. Contact your bank to find out how to do it.
You can also (and I encourage you to do this) call your credit card companies and ask for a reduction of your interest rate. This may be a little harder to get, but if they don’t want to do it, don’t despair. Call again in a couple of weeks, and ask again.
The bottom line is, credit cards are essential in our daily lives. They are not going away anytime soon. In there physical form, yes they may disappear in the near future (Apple pay anyone?) but the idea of credit is here to stay. I love using my credit card as I don’t like holding cash. With credit or any loan, it is important to understand the possible financial consequences of ignorance. With that said, there are many ‘cashback’ and ‘airmiles’ hacks that can make credit cards not only convenient, but fun to use. That’s a whole other topic of discussion though…