Gerber Life Family Times --- News and tips for familes of all ages and stages of life

Choosing a Credit Card  
Beware of hidden fees and artificially low rates.

 

FinancialIf you're like the majority of consumers in the United States, a daily trip to the mailbox brings an ever-present supply of bills, maybe some correspondence from friends or family, and an ever-increasing number of announcements that you are "pre-approved" for yet another credit card. It's hard to deny the fact that our world now revolves around revolving credit. Whether it's a local or national department store account, a gas card for easy fill-ups, or any of the thousands of cards offered by financial institutions and credit card companies, plastic is the payment option of choice for American consumers. In fact, according to American Consumer Credit Counseling, the average American household receives an average of seven offers a year by credit card companies. As of 2002, there were 1.2 billion credit and retail cards in North America and analysis of Federal Reserve data indicates that in 2005, Americans alone were paying an average interest rate of 18.9 percent on credit card debt in the amount of $800 billion.

Although some people have found a way to live without resorting to credit cards, the fact of the matter is that establishing a good credit history is vital in today's world and, once having earned credit, the purchasing convenience is something few people are willing to relinquish. Since credit cards aren't going away, the best thing to do, from a family's financial standpoint, is to be knowledgeable about the cards you currently carry and any cards you consider obtaining in the future. By doing so, you can better choose the cards that fit your spending habits and save money by wisely choosing cards that reduce the amount of money paid into interest and a variety of fees.

Obtaining interest and fee information is relatively easy. Credit card offers are required by federal law to be accompanied by a disclosure box (usually prominently displayed on the card offer) that states key information regarding the interest rates, fees, and interest calculation methods specific to the card being offered.

FinancialWhen choosing a credit card, the first step the Federal Reserve recommends is to consider how you will be using the credit card. If your plan is to always pay the monthly bill in full and you're not interested in special features such as points toward merchandise or frequent flyer miles, then a card with no annual fee and a longer grace period (the number of days you have to pay your bill in full without activating a finance charge) will be your best choice. If you intend to carry a balance from one month to the next, look for a card that has a lower interest rate. Make sure the interest rate is the Annual Percentage Rate (the interest rate stated as a yearly rate) and not an introductory interest rate that will only be valid for the first six or twelve months you use the card. Planning on using the card for cash advances? Choose a card that carries a lower APR and lower fees on cash advances (most cards charge a fee for the benefit of taking a cash advance and also charge a higher interest rate on the cash advance amount than for purchases).

Minimizing fees is another way to save yourself money. Typical fees that you may see associated with a credit card include:

  • An annual fee may be charged just for the privilege of having the card. The amount may be anywhere from $25 to $50 for basic consumer credit cards and $100 or more for premium "gold" and "platinum" cards which provide additional benefits such as purchase insurance, product warranties, and emergency services. Some companies may even charge a monthly fee for using the card.
  • Balance-transfer fees occur when you take advantage of a card's offer to transfer a balance from one (typically higher interest rate card) to another (lower interest rate) card. Balance transfer offers are most often accompanied by "checks" from the credit card company to pay off the other card.
  • Cash advance fees may be charged to your card for using the card to take a cash advance. The fee is in addition to the cash advance amount you will have to pay back and may be a flat fee or a percentage of the cash advance.
  • Late-payment fees occur when your payment is received after the payment due date.
  • A minimum finance charge may be applied when you carry a balance even if the interest on the balance is below the minimum charge set by the credit card company.
  • If your interest amounts to thirty-five cents and the minimum finance charge is $1.00, your account will show a charge for $1.00.
  • Over-the-credit-limit fees are charged if your purchases go over your established credit limit. If you request an increase in your credit limit, you may also be charged a credit-limit-increase fee.
  • If you pay your credit card with a check and the check is returned for non-sufficient funds, the credit card may charge you with a return-item fee.
  • A set-up fee may be charged when you open a new credit card account.
  • Some credit card companies charge a fee for making a payment using the telephone or even to cover their costs of reporting information to credit bureaus. Be sure to read any and all credit card offers you are considering thoroughly and highlight any potential fees.

Also, be aware also that credit card companies provide low APR rates on cards for customers who make on-time payments. If you are late a certain number of times during a specified period of time, the APR on your account is likely to rise substantially, often exceeding 20 percent. Such "delinquency rates" should be disclosed on the credit card application or in the credit card solicitation.

One great way to put your credit card situation and possible offers into perspective is to create a grid analysis comparing specific cards. To do so, list various credit cards you have or are considering one after the other and list the variables associated with each card (APR, annual fees, cash advance fees, etc.) as well. By filling in the blanks you'll be able to see a more complete picture of what you are, or will be, paying for each credit option. This "apples to apples, oranges to oranges" comparison can greatly simplify the decision-making process and will help you keep more of your hard-earned dollars in your household budget's "plus" column.

With some reading of fine print and judicious note taking, you'll learn a great deal about how much of your monthly credit card payment goes toward interest and fees. You'll also gain insight into the business of consumer credit and that education will pay benefits to your family budget for years to come!

Sources:
Federal Reserve Board—www.federalreserve.gov
Federal Trade Commission—www.ftc.gov
American Consumer Credit Counseling—www.consumercredit.com

Articles are provided for the general interest of our readers. Gerber Life Insurance is not responsible for any content and recommends that you consult the appropriate professional with any questions or concerns you may have concerning any financial or health related issues.



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