Good and Bad Deals in Credit Cards

More of Wayne's Story
Wayne, who you met in Chapter 6, after reviewing all of the possible credit card types and options, has decided that he wants to get both a Visa and a Master Card.

That's a good start. But now what? The terminology on the applications is very confusing. A call to his parents didn't help one bit. The extent of their "technical advice" is, "The cards we have work for us."

Susan suggests they make a night of it-Chianti, candles, soft music, and a stack of credit card applications. Wayne arrives early, eager to begin.

Factors to Consider
There are three principal features to the card itself that determine whether or not you've found a good deal. These are the Interest Rate, Annual Fee, and Grace Period. By law, all three must be disclosed at the time you apply for the credit card. The United States Fair Credit and Charge Card Disclosure Act requires issuers of charge or credit cards (including retail stores) to reveal certain basic information in tabular form with the application or "pre-approved" solicitation.

Disclosures also must be provided before annual renewal if the card issuer imposes an annual fee. Other things to consider are Rebates, Discounts, and Miscellaneous Fees. Also important is the pattern of your shopping-a card that your favorite merchants don't honor won't be of much use for you.

Interest Rates
The interest rate is the rate charged on purchases and cash advances (generally, two different rates). It can be "fixed" or "floating." Fixed rates are not truly fixed because the banks will change them every year or so. Floating rates typically are a bit lower than fixed rates, but fluctuate every month according to the latest T-bill sale, the phase of the moon, or some other index (just kidding about the phase of the moon-sort of). By law, banks must apply floating interest rates according to a regulated index. Still, if you buy something you're expecting to pay off over many months, a floating interest rate will make it hard to guess how much finance charge you'll be paying. Some credit cards may refer to a "variable rate," which is the same as a floating rate.

ANNUAL PERCENTAGE RATE (APR)
Years ago, credit card issuers would quote an interest rate that was not directly comparable with other lenders' rates because the method of computation was not standard. The law now requires lenders to quote an annual percentage rate so that you might compare cards-a rate that includes the interest and all fees for a year (i.e., the total cost of the "loan" for the course of a year).

MAXIMUM INTEREST RATES
Interest rates are all over the map. There are limits, however, in most states on the maximum interest rates allowed. The laws concerning maximum interest rates are called "usury laws."

INTEREST RATE CALCULATIONS
To calculate the interest on your card each month, the lender multiplies the card's interest rate (the APR) times your card balance. This will give the interest for the entire year. The lender then will divide the interest calculated by the number of months in the year (12). The sticky part is determining the credit card balance.

This is why it's important to choose a card with a grace period (see below). If you do have a balance on your card, there are three methods of calculating it:
1. Average Daily Balance (the most common method): The issuer calculates the balance by taking the amount of debt you had in your account each day during the period covered by the billing statement and averaging it.
2. Previous Balance: The issuer uses the balance outstanding at the end of the previous period-that is, the period prior to the one covered by the current billing statement.
3. Adjusted Balance Method: The balance is derived by subtracting the payments you've made from the previous balance.

Annual Fees
The annual fee is, well, a fee that the card issuer bills to your account annually. Every year, on the anniversary of the date your account was opened, the fee for the upcoming year is billed to your account. Typical charges are $18 to $29 for regular bank cards (about $40 for gold bank cards) and anywhere from $35 on up for various flavors of T&E cards. House cards are typically free.

Many lenders waive the fee the first year to get you to sign up, then depend on you to forget a year later that you'll be charged an annual renewal fee. There's nothing shady about this as long as it's disclosed up front. Some lenders often have "secret" programs in effect where, if you ask them, they will waive the annual fee. Some do it only if you charge a certain amount per year; others have other criteria. It certainly can't hurt to call just before renewal time and ask to have the fee waived. (If you wait until after the fee is already on your statement, your chances aren't so good for getting it waived.)

Some banks will waive the annual fee if you tell them that you'll go elsewhere if you have to pay it. Others will not. You may want to ask (politely) to talk to a supervisor, since the front-line person may not care whether you cancel your card and may not have the authority to make concessions. Don't bluff on this unless you are confident you can get a card elsewhere.

Grace Periods
The grace period is the time after the billing date that you have to pay off the bill without paying a finance charge. Grace periods for cash advances are pretty rare, since the bank would lose money on them. T&E cards typically have generous grace periods; bank cards usually have 25 days, but a few have 30, and many have no grace period. In every case, the grace period runs from the date printed on the bill, not from the date you get the bill. For instance, suppose your bill is prepared on the 28th of every month and the grace period is 25 days. If you make a purchase on July 3, it will show up on the July 28 bill and you'll have until August 22 (July 28 plus 25 days) to pay it off without interest. If you don't pay the full balance, your August bill will show a finance charge, and so will every bill after that until you pay off your full balance.

Some banks give you a grace period only during those months when your previous balance is zero. Others (fewer of them all the time) give the stated grace period on all new purchases even if you have a balance from last month. The second method can save you big bucks; be sure to find out how your bank does it when you apply for the card.

Rebates, Discounts, and Other Kickbacks
Some cards, such as Discover, pay "rebates." Rebates are a percentage refund on your purchases, either by check or by a credit to your account. Discounts, on the other hand, actually reduce the price on the bill before you pay it. Discover offers rebates on all purchases. The Ameritech Complete MasterCard gives 10% rebates on credit card calls at the end of the year. Some things to keep in mind when looking for cards with rebates are:
1. When will the rebate be issued? At the end of the month or at the end of the year? Typically, it's after the end of the year.
2. How is the rebate calculated? Be sure to read the fine print. For example, let's say that Discover advertises "up to 1% rebate." That's true, but the fine print reveals that you get back 1% for every dollar you charge after charging $3,000 in a single year. The first $3,000 is rebated at rates between one-quarter and three-quarters of a percent.

Some cards offer other features like frequent-flyer miles and extended warranties on purchases. Is this a good thing? It may or may not be. Consider such questions as these to help you make this determination:
1. Does the airline fly to places you really want to go?
2. How many dollars must you charge to earn a free ticket? Is the airline likely to be around by then?
3. Are you likely to spend more than you otherwise would, just to accumulate the miles?

Miscellaneous Fees
You have the right by law to know about all possible fees before your credit card application is processed.

APPLICATION FEES
Application fees are extremely rare with unsecured cards, but with secured cards they are very common. Though such fees are legal, look long and hard at the terms before you agree to pay an application fee, even if you are "guaranteed" acceptance. For an unsecured card, you can almost certainly do better elsewhere.

OVER-LIMIT FEES
Many cards assess an over-limit fee if you charge something that takes you over your credit limit. The creditor may or may not allow the charge if it assesses this fee. Common over-limit fees range from $20 to $29.

LATE PAYMENT FEES
Some cards charge a late payment fee in addition to the finance charges. Again, a fee of $20 to $29 is common.

CASH ADVANCE TRANSACTION FEE
Some cards charge a transaction fee for cash advances. This may be a flat amount (around $2), a percentage of the transaction dollar amount (1% to 2% is common), or a combination. These fees are in addition to the stated interest rate, which usually starts accruing as soon as you get the money.

Tips for Cutting Your Credit Card Expenses
1. PICK A CARD WITHOUT AN ANNUAL FEE
Some credit card companies can charge you as much as $50 a year. With all the choices out there, don't fall into this trap.
2. NEVER MAKE ONLY THE MINIMUM PAYMENT
Credit card companies make the majority of their money from you through interest on the unpaid balances on your credit cards. The minimum payment some credit cards ask you to make will not reduce the balance on your credit cards very quickly, if at all. For example, consider a $1,000 balance at 18% (a low rate by some cards issued today). If you make the minimum payment on the card (typically about 3% of the balance), it will take you six years and one month to pay off the balance, including an additional $559 in interest. That is, if you never purchase another thing with this credit card until after the balance is paid off.
3. PAY OFF THE FULL BALANCE
If you must carry a balance, always pay as much as you can afford every month.
4. PAY ON TIME
Mail your payment check early. Late credit card payments hurt you three ways:
(1) Bad credit reports, which you already know about; (2) Late fees ranging from about $20 to $29; and (3) Bumped up interest rates-as few as one or two late payments during one year can put you into the penalty box (causing your interest rate to jump to a "penalty rate" of 24% or more). Make sure you send in your payment a little extra early - some companies are known to be "slow" about getting your payment from their mail room to the processing center, which can result in a late fee, even if the payment itself was received on time. Try to allow one week for your payment to arrive.
5. BEWARE OF CREDIT LINE INCREASES
If you make timely payments, your bank will automatically raise your credit limit without asking you, and other banks will send you offers for more "pre-approved" cards. This could be good or bad. If you have a tendency to push the limits on your credit cards, they could entice you to go more into debt with this additional available credit. On the other hand, such credit line increases could give you a better debt-to-available-credit standing-but only if you keep the balances where they are -thus, actually increasing your credit score because you have all these high available credit amounts (which means you can be trusted) yet you keep low balances (which means you handle money well).
6. AVOID CASH ADVANCES
Don't use your credit card like an ATM card for cash withdrawals. The interest rate on cash advances is at least 2% higher than on purchases and the interest begins to accrue immediately.

Students Beware!
College students are special to the credit card companies. Our friend Wayne, for example, could likely score plenty of credit cards (and potentially get himself into deep trouble) even if he has no income. Why? Because he has the potential of earning a good income once he graduates.

Believe it or not, if you're in college, credit card companies want your business so badly they're offering much more than trinkets and soda. They'll let you apply for credit cards without a job or income! You can apply for credit cards with a blank credit report, even without getting a co-signer! No other consumers can get cards this way. They want to get you hooked early-like giving cigarettes to kids in junior high.

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