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Manage Credit Cards

You can’t live with them and you can’t live without them!

Credit cards  are a wonderful convenience and a terrible temptation.  It is so easy just to “charge it” and not worry about your balance until it gets out of hand. 

Millions of us let our balances get out of hand every year.  A whole industry has been built up to help people deal with excessive credit card debt.

If you are already in that situation, read about how to deal with your creditors, based on the amount you owe and to whom, in the links to the right. These articles will tell you how to deal with the debt and how to get back onto firmer financial footing. 

This section helps you manage credit cards more efficiently.  We will answer the questions you should be asking yourself before you sign up for another credit card or make another purchase with plastic.

  • Why pay interest you don’t have to? 
  • Can you avoid paying interest at all? 
  • How can you minimize those awful fees?

 

If you aren’t borrowing their money, they would just as soon you go away.

While credit card companies make some money by charging merchants a small percentage of the amount you charge to your card, this is not enough to keep them in business.  People who pay off their bills every month (which I highly recommend, if you can do it) are called “transaction customers” and credit card companies aren’t real happy to have them.

The credit card companies want borrowers.  And the more you borrow the better.  That’s why they keep raising your limit. 

But borrowing from your credit card is often the most expensive way to borrow money legally.  And most of those who use their credit card to borrow, compound the costs by making the minimum payment. 

Recently the federal government told credit card companies they had to raise the minimum payment because, by keeping it low, they were encouraging people to spread out their borrowing over as many as 30 years.

Think about that a minute.  Let’s say you bought a $2,000 TV and charged it.  You never used that credit card for anything else and you never made more than the minimum payment. In the end, you'll have spent more on interest - more money to the credit card company - than the original price of the TV.

How does that happen? Well, if the minimum payment was 2% of the balance, it would start at $40 a month. Of that $40 payment, well over half would likely go to interest.  (At 1.5% per month, interest on $2,000 is $30.) Next month you would still owe about $1,990 on the balance (depending on how much interest you were paying) plus about $29.80 in interest.  Your payment would be about $39, and still most would go to interest.  And on and on it goes.  By the time the balance finally reached $0, you could have bought two TV's.

 

Do you have to borrow on your credit card?

Credit cards are making unsecured loans.  That means if you file bankruptcy they cannot take anything from you (like your house or car) to get their money back.  That is why (they say) they charge so much interest. 

Credit card companies charge a lot in interest - 2% per month on the unpaid balance is not unusual.  And that is a huge rate. It makes a lot more sense not to borrow at all and pay off your card balance monthly. If you need to borrow, it is better to borrow in some other way if you can. For example:

  • If you have money in a savings account but do not want to spend it (for good reason) then you should consider what some banks call a “passbook loan.”  In essence you are borrowing your own money, but the net interest you pay (after deducting the interest they pay you) is usually very small.
  • If that’s not feasible, you could borrow against the equity in your house (see our mortgage section for more on that).  You should be careful not to make your payments too high because you could lose your house, but you will get a much better interest rate than you will ever get with a credit card.

 

How to get the lowest interest rate possible.

If you decide you need to borrow on your credit card, or you want to use your credit card for borrowing, you can take advantage of the competition in the business to keep your interest rate as low as possible.

Of course the first thing to check is your credit score.  Once that is done, the best way to keep interest rates as low as possible is probably to “kite” your loans balances.  That is take advantage of every introductory offer you get in the mail, shift all your balances to the new card, and cancel the old one. When the introductory offers runs out (usually after six months to a year), open a new account with an introductory offer, transfer your balances and move on.

Some credit cards offer very low interest on “balance transfers” (I am looking at one right now that offers less than 1% Annual Percentage Rate (APR) on balance transfers), and you can do something similar with that.  Transfer balances from another card and pay the low introductory rate for those transfers.  When it runs out, you don’t have to cancel the card, just transfer all the balances to another card with low introductory rates or low rates for “balance transfers.”

If you don’t want to be bothered with all that work, then shop around.   In just a few minutes at one site (www.creditcards.com) we found a dozen cards with zero percent introductory APR for 12 months and interest as low as 10% APR after that.  This is much lower than the 18% typically charged for even those with excellent credit.

Be careful when transfering a balance. Often there is fine print that can trick the consumer into paying more than they think they will. For example, in this case between the OCC and Providian Bank for unfair credit card practices In one section from this document: "consumers who agreed to transfer credit card balances to a Providian-issued card were promised lower rates than they had been receiving. However, the OCC believes the bank marketed it in such a way that customers did not find out how much they would save until after they signed up with Providian and transferred balances.In fact, some customers actually ended up with higher rates than before -- up to 21.99 percent -- and then found out they could not move balances out of the account without paying a 3 percent balance transfer fee.".



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