Credit Cards – Page 3

When should you use a credit card?

When should you use a credit card? I get asked this all time. There is no simple answer for everyone. Only you know what kind of spender you are.

Here are some general guidelines:

You can charge anything within your monthly budget if you pay your credit card bill in full each and every month.

However, you should think twice before using your card if you are paying down your debt and are currently incurring interest on your credit card bill.

Some people feel that you should never use a credit card. I disagree. Credit cards can actually help you maintain a good credit rating if you stay within your means. And, some credit cards offer benefits like consumer protection. These benefits should come with the card at no cost, or minimal cost, to you. Here are some examples:

American Express offers travel insurance at a minimal cost when you charge an airline ticket.
Some credit cards offer purchase protection on lost or broken merchandise.
Some credit cards offer an extended on purchases.
Some offer insurance coverage on rental cars.

Know all the perks that come with your credit card, that can help you decide whether to make a purchase on credit. If you’re not sure what benefits your card offers, call them for details.

Debit or credit?

Which should you use: a debit card or a credit card? You all know the difference between the two – a debit card uses your own money and a credit card means borrowing with interest.

Here is what I recommend:

Use a debit card when…

You make everyday purchases in person. These are items that are part of daily living: groceries, doctor co-pays, restaurant meals, etc.

Use a credit card when…

You are purchasing big ticket items, anything with a warranty, travel reservations, online purchases, etc. Using a credit card will (usually) give you extra consumer protection for little or no additional cost.

More about that added layer of protection:

When you travel, certain credit cards give trip insurance for items such as lost luggage protection. If you are purchasing electronics, some credit cards extend the warranty period. If you purchase something online and it never arrives (or arrives broken), you can dispute the charge with your credit card company after you have attempted to resolve this with the merchant. You should check with your credit card issuer to see what benefits you have with your credit card. Then make your purchases where you will get the most benefits.

Pay More than the Minimum

You know that little box on your credit card bill that tells you how long it will take to pay off the balance if you only pay the minimum due? Does it scare you? It should. You may be tired of hearing it, but I can’t tell you this enough. Pay more than the minimum.

Here are a few things you should know:

Let’s say you have a $10,000 balance at 12% interest and the minimum payment is $200 per month. You should know that if you stop using this credit card, and that means no more charging on this account, it will take you 70 months – almost 6 years – to pay off the balance and will cost you over $9,000 in interest.

Now think about this: Was whatever you purchased worth that additional cost?

Enough about that. You have debt. What are your options?

You could pay it off with your savings (I am not talking about retirement savings). But, chances are if you had the money in savings, you wouldn’t have made the charges.
You could figure out a way to get more income. Get a part-time job, turn a hobby into some extra cash, or sell items that you don’t need.
You could reduce your expenses. Mow your own lawn, cancel cable TV, stop eating out, etc. (Read my upcoming Quick Tips article on July 22nd for more information.)

Paying the balance off as quickly as possible is in your best interest. Let’s use my example above:

If you could increase your payments by $50, you would save 18 months of payments.
Increase it even more to $100 extra per month and you would cut the time to 41 months.
Pay $200 each month (that’s double the minimum) and you could have the balance paid in 29 months and only pay about $1,600 in interest versus the original $9,000.

Paying your credit card balances off as quickly as possible is a great thing. Make your new budget plan and get started.

What is the difference between a secured credit card and a pre-paid credit card?

Secured versus pre-paid credit – do you know what you’re getting? When I am giving a talk, I can see that many people don’t know the difference between them. Let me tell you the facts:

Secured Credit

With Secured Credit, the bank has placed a set amount of your own money in a special savings account that it controls. If you default on your debt, the bank can use the savings account to recover its losses. Your credit limit is always equal to the amount in the special savings account. Just like a traditional credit card, you will pay interest and receive a monthly bill.

A secured credit card is for someone who can’t get a traditional credit card. If you have bad credit or no credit at all, secured cards are a great way to establish your history. If you still don’t understand what a secured card is, think of it as a security deposit on a rental. The landlord holds that deposit and can keep it if you don’t pay.

As with any financial transaction, read the fine print before moving forward and make sure that the lender reports your information to the credit reporting agencies. Watch out for fees and make sure you understand them fully.

Pre-Paid Cards

With pre-paid credit cards, you simply load the card with money and use the card to make purchases. There are no bills or interest rates on purchases. The spending limit is always the current deposit balance on the card. In that sense, it works like a debit card, yet it has all the consumer protections of a credit card.

Pre-paid cards are often used as gifts and by people who want to avoid spending beyond their budget. You might use one on your next vacation or as a gift for your favorite college student. The consumer protections and the built-in spending limit make this card ideal for those two scenarios.

The fees can be expensive! Credit card companies make their money with the fees – activation fees, monthly fees, reload fees, etc. You might want to consider other alternatives for every day use.

Now you know the difference between them. Make sure you understand them and pick the right choice for you.

The legend of the no-limit credit card

Question: Which financial institution created a credit card based on an urban legend?

(The answer to our trivia question is at the bottom. But first, let’s talk about your credit cards.)

Are your credit cards right for you? If you’re not sure, here are some key points you can compare to determine which product is right for you.

Is the interest rate fixed or variable?
If you carry a credit card balance, you will want a fixed rate. If you pay in full each month, the rates won’t matter.

Will you use the card for purchases, balance transfers, or cash advances?
Your credit card company will apply a different rate for each transaction, so pick the right card with the right rates for your financial plans.

Is there an annual fee just to have the account?
You may not want an annual fee. However, if the annual fee covers your membership to a discount service or store (like a big box store), you may find that it’s worth it.

Ask about any other costs or fees.
Look for late fees, membership fees, over limit fees, returned payment fees, etc).

How is the billing cycle calculated?
Does the due date suit your monthly budget? If the card is due on the same date as your mortgage, that could cause trouble.

Your credit cards should work with the way you spend money and pay bills. Don’t let your cards cause you more trouble than convenience.

Trivia Question Answer:
The (virtually) no-limit credit card, the Centurion, was created by American Express for no other reason than the persistent rumors that it actually existed. This card is obviously meant for the rich and famous. For those of us with bigger dreams than budgets, a no-limit card would be a disaster. Fortunately, the Centurion is issued by invitation only.

Paying the Holiday Bills

Now that the holidays are over, it’s time for the bills to start to come in This time of year is when you need to be extra careful about your finances I know that this is a resolution that many of you made on January 1 You need to be carefully checking your statements (both your bank and credit card accounts) for accuracy In my experience, this is when the most errors occur So check those statements to your receipts, balance your checkbook and immediately call to dispute any discrepancies Look for unfamiliar transactions that you are unsure of Sometimes a charge will appear with a different company name than the store you made the purchase from Call to get more information to determine if it’s your transaction The longer you wait, the less protection you have.

In addition, now is the time of year to read the inserts in your statements You know those pieces of paper that you automatically toss Banks and creditors will inform you about changes to your accounts increased fees, new requirements etc You need to know about these before they take affect and it’s too late to do anything about them.

Be proactive with your finances by staying on top on what is happening with your money, will benefit you in the long run You will be able to make choices that are right for you and possibly save you money on fees Wishing you a happy and prosperous new year.

What’s up with credit card companies lately?

There was a time when our mailboxes were full of credit card offers. Now the offers have been replaced with policy change notices.

Credit card companies are racing to make changes before the new regulations hit in February 2010. They’ve have had a bad couple years. It used to be easy to make money in the credit card business, but things have changed.

The first issue is defaults. Because of unemployment, more people are defaulting on their debts. So, credit card companies have been lowering everyone’s credit limits to help reduce the risk. Their reasoning is sound. The less debt you have, the less debt they will have to cover. Expect your credit card limits to fall even if you have a good payment history.

The second issue is pay offs. More people are paying off their credit card debt because they’re anticipating layoffs. This means that the creditors are earning less from interest payments. They need risk-free revenue, so they’re looking at annual fees. Expect your credit card company to either add an annual fee or increase the fee you already pay.

Right now, under the old regulations, they can still make changes to your account with minimal notice. If you get an unpleasant policy change in the mail, you should definitely call the credit card company and try to get them to revert back to the original terms. If that doesn’t work you can always close the account.

Which saves you more money: a debit card or a credit card?

Which saves you more money: a debit card or a credit card? Most people believe debit cards are cheaper because there’s no interest rate or annual fee. But what about overdraft fees?

Debit card overdrafts are now the biggest source of revenue for banks. The danger with debit cards is twofold: One, the transactions hit your account instantly and two, very few people keep track of their debit card transactions in a check register.

Debit cards are convenient and fast. We use them for everything from buying $200 worth of groceries to $1.50 take-out coffee. The problem is that we aren’t notified at check-out if our account is overdrawn like we would be if we had maxed out a credit card. And overdraft fees are expensive – approximately $30 per transaction. Some people have found themselves with $60 – $1,00 in overdraft fees in a single day because they continued to use their debit card while their account was overdrawn.

Please, take a moment to record your debit card purchases. Remember, too, that debit cards hit your account instantly but deposits don’t. If you deposit a check and use your debit card on the same day, the debit card transactions will hit your account before your deposit clears.

Do You Share the Credit Card Equally?

If you share a credit card account with someone else, you are either an authorized user or a joint credit card user. Knowing the difference can help protect your credit score.

If you’re an authorized user, it means you can use the credit card account, but you’re NOT responsible for the payments. You have a card with your name on it, but you’re not the “card-holder.” The account won’t appear on your credit report, so it won’t help, or hurt, your credit score.

In the past, parents could add a child as an authorized user. This helped the child start his credit history, making it easier to get that first car loan or student loan. Because of some abuse, credit reporting agencies stopped monitoring authorized users. It’s now more difficult for children to begin building their credit history, but not impossible.

If you’re a joint credit card user, you and the other person were considered equally when you applied for the account. You are both responsible for the payments and the account will show up on both your credit reports. Joint card-holders should make a habit of reviewing bills and payments together to help protect you both from mistakes or fraud.

Why It Isn’t Enough to Pay the Minimum

“Can you tell me how long it will take to pay a $2,000 credit card balance? I’m paying the minimum every month and the balance doesn’t seem to be going down.”

You could be right about the balance. First thing that you should know is that credit card minimum payments are only about 1.5% and 2.5% of the balance. So for a $2,000 balance, that would be between $30 and $50 per month. Included in that minimum payment is the finance charges (that’s how the bank makes its income – from the fees). To let you know how long it would take to pay off, I would need your interest rate (which I don’t have), but here are two examples:

$2000 Credit Card Balance at 6% Interest

Rate	Minimum Pmt	Pay Off Time
6%	$30	80 months or 6 years
6%	$50	45 months or 3 years

$2000 Credit Card Balance at 12% Interest

Rate	Minimum Pmt	Pay Off Time
12%	$30	108 months or 9 years
12%	$50	51 months or 4 years

You can see that little of your payment is actually going towards reducing the $2,000 balance. The estimate above also assumes that you aren’t using the credit card to make more purchases.

You do have a couple options for a quicker payoff.

Option 1: Pay more than the minimum amount. Paying as little as $10 more per month will help you see some progress. You’re saying you don’t have an extra $10 to spend on your payment? Take a look at your spending habits and see where you can come up with that money. Bring your lunch to work, borrow books and movies instead of buying, and get your hair cut every 7 weeks instead of every 6 weeks. Little things add up. The great thing about this, is that it’s temporary. Once your debt is paid off, you can breathe a sigh of relief, and go back to the 6 week haircut or treat yourself to a rental. Or, you may find you have new habits that will allow you to start saving money.

Option 2: Lower the interest rate. You can do this by transferring the balance to another card that’s offering a zero percent rate or a low rate. These are limited time offers. If you don’t pay it off on time, you’ll get charged interest again. Make every effort to pay off the balance before the special offer is up. This way you can make sure that most or all of your payment is going toward the balance and not toward fees.