This is article one of Part Two of the “Conquering Debt Series.” Read Part One here.
As a rule of thumb, credit card should be considered low-priority debt. However, you may find that credit card obligations are your biggest worry due to collection calls, high interest rates, or unmanageable minimum payments.
You are not alone. The average credit card debt of all American households in 2017 was $15,983 according to Nerwallet.
Contrary to what people might believe, massive credit card bills are not mostly due to irresponsible overspending. Many people end up using credit cards to meet pressing family needs after losing a job or due to emergencies. Others find themselves in credit card debt due to snowballing finance charges, late payment penalties, or other high fees.
I know just how enticing credit cards can be. In 2011, I racked up over $21,000 in credit card debt and spent the next four years paying them off. Some credit cards may promise you exclusive benefits, such as a low rate or no annual fee. In some cases, the lender will lure you with frequent flyer miles, cash back, reward points, or freebies.
In today's society, it can be hard to get by without a credit card. You may need one to travel, for buying things over the internet or to purchase items over the phone. There are times where I think using credit cards can be beneficial, but if you are concerned about getting into too much debt, there are other types of payment for these purposes, such as debit cards or prepaid cards. Just make sure to watch out for overdraft and additional fees.
Shopping around for credit cards can also be hard. Lenders hype low introductory or “teaser” rates, but then downplay the expensive fees, high post-teaser rates, and other traps that come with the card.
Here are some steps you can use to make sure you don't get into trouble with credit cards.
DON'T ACCEPT TOO MANY OFFERS
There is never a good reason to carry more than one or two credit cards. You should be very selective about which credit card(s) you choose based on what's right for you.
Owning too many credit cards can lead to bad money decisions and unmanageable debts. Save yourself from the temptation of spending, and don't accept more offers than you need to.
Having too many credit cards can lower your credit score.Click To TweetBEWARE OF SUBPRIME CREDIT CARDS
If you have bad credit, most lenders will turn you down. But some lenders will offer you subprime credit cards. These cards usually come with extraordinarily high interest rates, expensive fees, and low credit limits.
They sometimes throw in unnecessary products such as “credit protection.”
It's best to avoid any credit cards that advertise as helping with “bad credit.” Not only do they cost you a fortune, but they could end up making your credit history even worse. An example of this type of card is called the “Fee-harvester” credit card, which comes with extremely high fees and low credit limits when the account is opened.
The Credit CARD Act (Credit Card Accountability, Responsibility, and Disclosures) bans abuse by credit card companies. It restricts fees to 25% of the credit limit (which is still really high), but creditors are trying to open a loophole by charging fees BEFORE the account is opened.
Word of Advice. Avoid these credit cards.
LOOK CAREFULLY AT THE INTEREST RATE AND KNOW THAT IT CAN CHANGE
It's critical to know the interest rate on the credit card you want and try to find the lowest rate possible. Did you know that credit card lenders usually have several interest rates for a credit card? They also regularly change their rates, but the Credit CARD Act limits these rate increases (with a few exceptions) to new transactions.
Here are some important terms you should know!
- APR: This is the interest rate expressed as the annual figure. Most credit cards have different rates for purchases versus cash advances versus balance transfers and other types of transactions.
- Variable Rates: This is the rate that most credit cards use. I won't go into the boring details of how the rate is calculated. I want you to know that if the credit card has a variable rate, it means that it can change at any time. Just because you signed up for a low interest rate, doesn't mean it will stay that way.
- “Teaser” Rates: These interest rates are an artificially low interest rate that only lasts for a certain amount of time. Federal law requires that these rates last six months. After that, it goes up. That means if you end up charging up a balance while the teaser rate is still in effect, you'll be repaying the debt at a much higher post-teaser rate.
- Penalty Rate: In the excellent print of your credit card contract you will see that your interest rate increases if you make a late payment or go over your credit limit. The Credit CARD Act doesn't allow lenders from imposing the rate on your existing balance unless you are over sixty days late. The new higher rate will still apply to new purchases and cash advances.
FEES, FEES, FEES
There are a ton of fees that may be associated with a credit card. Some of these fees include late fees, over-the-limit fees, annual fees, membership fees, cash advance fees, balance transfer fees, foreign currency fees, and many more.
These fees make the cost of your credit card substantially higher so that the card that appears cheaper with a low APR could end up being much more costly than you thought.
Don't just look at the interest rate.
UNDERSTAND THE GRACE PERIOD
There is usually a certain amount of time in which you can pay off purchases without incurring finance charges, which is known as the grace period. If there is no grace period, finance charges start accruing immediately, and a low rate may be higher than it looks.
You need to be paying off the balance in full every month, which means having a grace period is essential. Lenders have to mail your credit card statement at least twenty-one days before the end of the grace period. The more extended the grace period, the better!
DON'T FALL VICTIM TO BAIT OR SWITCH OFFERS
I bet you have received at least one credit card offer in the mail before. Some credit card lenders will send you a desirable offer ( a low-interest card with a high limit) but include in the fine print that they can substitute a less attractive, more expensive card if you don't qualify for the advertised one.
COMPARE THE DISCLOSURE BOX IN THE CREDIT CARD OFFER TO WHEN YOUR ACCOUNT IS OPENED
You can find disclosures about the terms of a credit card offer in a little box, usually on the reverse side of (or accompanying) the credit application. Inspect this carefully. You should always make a copy if you can.
When you get your new credit card, you will receive a second disclosure in the form of a box. Take this box and compare it with the first box in the credit card offer. You might find that the terms of the offer have changed, usually the APR.
IF YOU ACCEPT & RECEIVE A NEW CREDIT CARD & DISCOVER TERMS YOU DON'T LIKE: CANCEL IT!
You don't need to keep a credit card if you don't like the terms they sent you. If the lender changes the terms for your card, you have the right under the Credit CARD Act to reject the changes and to close your account. If you have used the card, you will need to pay off the balance before closing or canceling.
When it comes to credit cards, the interest rate is not the only important factor to consider. There is a lot to investigate and learn before accepting a new card.
