In Plastic We Trust: 4 Keys for Smart Credit Card Use Pt. 3

(continued from part 2)

3. Research and Choose Wisely

Shop around; know the terms and conditions before accepting a credit card offer.

I’ve come to the realization that a lot of times people don’t know what’s going on and they don’t want to know what’s going on… until it’s too late. As long as it’s easy and they can have what they want, that is good enough… until there’s a discrepancy.

Therein lies the self-imposed problem when it comes to credit cards. You have to know what’s going on if you’re going to get the best rates, be able to use your card to your advantage, and not get smacked with all kinds of fees you didn’t know about.

Did you know…

…that according to R.K. Hammer Investment Bankers, a California credit card consulting firm, banks collected $14.8 billion in penalty fees in 2004?

How many enraged customers do you think called up their credit card provider saying things like — “but I didn’t know anything about those fees.” or “I didn’t know my APR was going to go up that high.”

When I got my first card in college, I was one of those enraged customers. But it was my fault and being angry didn’t make the bill any lower.

Once again, you want to know ahead of time.

You maybe surprised at how much terms and conditions vary from card to card. You can find out what you need to know, however, by reading the fine print and the Schumer Box or Disclosure Chart – the chart on the application that summarizes the main terms and conditions for the card.

Many people make the mistake of only going over the Disclosure Chart so they miss out on other hidden charges and transaction fees until their statement arrives in the mail. Read the fine print.

ANNUAL PERCENTAGE RATE (APR)

The Annual Percentage Rate is the amount of interest you pay based on the balance you carry on your card. Your APR could be any where from a reasonable 7.99% all the way up to an outlandish 29.99%!

The national average is around 15%. The average for college students is around 17%. The APR on my first card was 23.99%. Ouch.

When you’re reading the fine print take notice of whether or not they’re offering you a fixed APR or a variable rate, which is not good. Find out if it’s an introductory rate that is going to go up after six months. Also, find out if your APR will increase if you make a late payment.

By the way even with a fixed APR, you should know that credit card providers can still raise your rate. In some cases this could happen with as little as 15 days notice!

Tiered pricing is something you definitely want to be on the look out for. This anti-consumer practice denies you your right to know. A company sends you a range of possible APR’s such as 8.99%-18.99%. Once you’ve applied, the company then uses your credit history to determine your APR.

Did you know…

…that you can negotiate with your current credit card provider for a better APR? Call them. Tell them you want a lower APR. The better your history is with them the better your chances.

ANNUAL FEE

Some credit card providers charge an annual fee for the usage of their card. If your credit is good, you can find a credit card with no annual fee.

CREDIT LIMIT

This is the maximum amount of credit that you can charge to your card. According to research, 50% of all college students max out their credit cards. So be sure to choose a limit that you know you handle responsibly. You only want a limit high enough to take care of necessities and emergencies.

SECURED CREDIT CARDS

This is a card where you are required to put down a deposit that equals the amount of your credit limit. As long as you are responsible with your card(s) you won’t ever need a secured card. These cards are typically used by people with poor credit.

TRANSACTION AND PENALTY FEES

There are all kinds transaction fees that could be charged to your card. Cash advances, balance transfers, quasi-cash transactions – like buying lottery tickets – are some, but not all, of the types of fees you could incur.

Penalty fees include late payments and over-the-limit charges. Over-the-limit charges are HIGH. You might be wondering, “How can you charge more than your limit?”

One way people end up over the limit is by maxing out their cards and then receiving transaction or penalty fees at the end of the billing cycle. I was in serious pain when I started getting hit with over-the-limit charges on my first card.

If possible, you want to avoid transaction and penalty fees completely. These are the things that can cause you to end up paying $600 for a plane ticket that originally cost $300. Not cool.

GRACE PERIOD

This is the amount of time you have before interest begins to accrue on your purchases. The typical grace period is about 25 days. Paying off your balance before the grace period is up will save you money.

CASH ADVANCE

I messed up my second credit card by taking out cash advances to make payments on my first card. And a few times I took out an advance just so I could have some cash in my pocket. By the time I realized how much extra the advances were costing me it was too late.

Moron.

Unless it is an extreme emergency, NEVER get cash advances with your card. A cash advance is an immediate cash loan from your credit card. The APR on cash advances is higher than your normal APR, there is usually a transaction fee involved, and typically there is no grace period.

Once you’ve done your research and chosen wisely, this next key is…

(continued in part 4)

Sources:

Undergraduate Students and Credit Cards in 2004:
An Analysis of Usage Rates and Trends

The Nellie May Foundation

Variables Influencing Credit Card Balances of Students at a Midwestern University
Lucretia Mattson, Kathleen Sahlhoff, Judith Blackstone, Blaine Peden, and Abraham Y. Nahm