Credit-Card Hazards and How to Avoid Them
by David Bach
Credit cards are a wonderful convenience, but they can also be financial quicksand if you don't know how to use them properly. Unfortunately, most of us don't.
Overall, American families have an average of 7.6 credit cards each, and consumers as a whole owe around $800 million in credit-card debt, which works out to more than $9,000 per card-carrying household. No wonder only 4 out of 10 card holders manage to pay their bills in full each month.
Being a realist, I know credit cards are here to stay. So you should learn the techniques credit-card companies employ to maximize their earnings from you -- and use that knowledge to avoid the many pitfalls unwary borrowers tumble into.
Minimum Payment, Maximum Pain
The big secret of the modern credit-card industry is that issuers of plastic are in no hurry to see you pay off your debt. In fact, they make a lot more money if you make only the minimum monthly payment. And they're smart enough to know that if they ratchet down the minimum amount due low enough -- say, to around 2.5% of the total balance, which is where it's been lately -- you'll keep spending money, and they can make a fortune on you.
It's not in card issuers' interests for you to understand that if you borrow $10,000 on your credit cards and pay only the minimum payment with an interest rate of 19.98%, it will take you more than 37 years to get out of debt -- and before you do, you will have forked over nearly $19,000 in interest charges.
The government has been pressuring the card companies to raise their monthly minimums. As a result of the recently enacted Bankruptcy Abuse Prevention and Consumer Protection Act, many will be raising them to 4% this year.
But this, by itself, this won't solve the problem. If you're carrying a balance on any of your cards and don't want to be paying through the nose, you should still make a point of forking out more than the minimum payment. Your goal should be to pay at least twice the minimum every month. Assuming you aren't being charged an outrageous interest rate, you should be able to pay off your balance in less than five years just by doing this. So do it!
Late Fees' Bite
Here's another secret. Issuers of plastic don't really mind it when you're late making a payment because there's big money in collecting late fees. Indeed, according to R.K. Hammer Investment Bankers, a California credit-card consulting firm, more than 10% of the industry's revenue comes from late fees.
And those fees can really hurt. Not only can card companies can charge you penalties as high as $39 a month if you're even one day late, they can also hike your interest rate. To make matters worse, many card issuers have been shortening the time they give you to make a payment -- shrinking it from 30 to just 21 days. This means you have to watch carefully for your bill and be sure not to be late.
One way to protect yourself is to use your bank's online bill-paying service to schedule an automatic payment of double your current minimum amount due several days before your credit-card bill's deadline.
If you find yourself missing the due date anyway, call the card issuer immediately and ask them to waive your late fee. Assuming you haven't made a habit of doing this, they will generally give you a grace period. (Just to be sure, get a name or confirmation number from the person you speak with and double check your bill the next month to make sure you weren't hit with a late fee or interest-rate hike.)
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