Friday, April 18, 2008

Credit cards

In watching a Frontline program Secret history of the credit card it smacked me in the face that most people have the use of the cards backwards. They look at credit cards as if they were some source of savings or some secret stash of cash that they can carry around in thier wallets and use at a whim. They pay no attention to the fine print, the terms of the contract or the final interest rate if their credit changes or they miss a payment. I have a degree and I can tell you it's difficult for me to fully understand the legal fine print. But there are three things I look for when getting an offer. One is the teaser rate. How long before that changes from 0 to some astronomical rate? Two what's the grace period? It used to be 30 or 31 days. It's been dropped to 25 then 20 and some cards have no grace period meaning interest is due from the day you get the bill. And three the final interest rate along with any penalties and fees. I've seen those rates as high as 29.9%. with fees of $25.
Okay some basics here. The best way to use a card is to pay it off each month but I realize that you can't always do that. My personnal rule of thumb is to be able to pay it off totally in three months making three equal payments. So even with a 29+ % interest rate you'd only be paying 7.5% for the use of that money. If you make the minimum payments the bill and interest rates will continue for years.
Another thing people don't seem to realize is that if they don't like any changes the card company has made that you can look for a better offer. The best offers I've found have been with credit unions but even there you need to read the basics. I recently dropped a card because they had changed their terms even though I had used the card only a few times and paid it in full each month.
A better way to go as I may have mentioned some time ago is to save 10% of your take home pay. I know that this might seem hard in these economic times but you will always have the bills and if you pay yourself first all else seems to fall into place. Some banks and CUs let you make a loan on savings or cds. I know there are some financial wizards who say this is only borrowing your own money, but look at it this way. You aren't using the money in savings anyway so If you calculate the difference between the loan rate and the interest on savings, you'll get to use money for just a few % and the terms are far better if you get in trouble. An added bonus is that if you can pay the loan back before the term say 10 month instead of 12 you'll be uping your credit score and get even better offers in the future.

I hope this helped sombody. I had to learn the hard way.


J. Marquis said...

I love the debit card. It gives you the convenience of the credit card but keeps things real.

Demeur said...

The problem with debit cards is that the bank can hold more than the purchase price on your account and I've seen several people charged twice for the same purchase. Unlike a credit card it's very hard to challange a purchase made with a debit card. I keep up with Herb Weisbaum :)

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