How To Reduce Your Credit Card Costs
If you’re looking for a credit card, try to find one without an annual fee. If you already have a credit card with an annual fee, call the phone number on your monthly statement and ask if they’ll waive it. Many credit card companies will do so if asked because the credit card industry is very competitive and they want to keep you as a customer.
The worst thing about credit card debt is that you can end up paying interest on your interest. As your interest charges accumulate and get rolled into your balance, your next month’s interest is calculated on the amount you borrowed, plus the interest you’ve incurred, creating a snowball effect. That’s why it’s so important to pay as much as you can and not charge things you can’t afford to pay off by the end of the month.
Big Brother is watching. A late payment on one credit card will raise your interest rates on all your other credit cards and may raise your car insurance premiums as well. Credit card companies keep a close eye on your credit history. A late payment makes you a higher risk, and people who are higher risks pay higher rates.
Never look at just the monthly payment to determine if you can afford a new purchase, whether it’s a $100 electronic item or a $20,000 car. Look at the total amount you’ll pay in principal and interest over the life of the loan. Almost any amount can be made to look good by stretching out the repayment period, but you’re too smart to fall for that gimmick. The longer the repayment period, the more you’ll end up paying for your purchase, because of interest.
Consider a prepaid credit card as a set of credit training wheels until you have a little practice using credit and are confident that you won’t take any nasty spills. You or your parents will set a dollar limit and make a prepayment. You’ll be able to monitor your expenditures online or via monthly statements. When your account gets low, you just add more money to your card.
Read the fine print–always! Most credit cards have an introductory interest rate, which will most likely go up after a (usually brief) period of time. If you run up charges on your card, you may find yourself unable to make the payments when the rate increases.
If you can’t pay your credit card balance off at the end of every month, at least find one with a low interest rate. Check the fine print to make sure the low introductory rate lasts more than a few months or you could quickly end up worse off than you started.
Avoid department store credit cards like the plague, even if they offer a tempting 20 percent off on your first purchase. Their interest rates are usually double the rates on major credit cards, so stick with issuers like Master Card, Visa, Discover, or American Express, which are accepted nearly everywhere.
Don’t fall into the trap of thinking you can afford to use your credit card just because you can manage the minimum monthly payment. Most of the minimum payment goes toward interest and very little toward paying off the principal, which means it could take you 20 to 30 years to pay off your balance.
Always pay more than the minimum payment on your credit cards, which is usually 2 to 3 percent of your balance. If you pay the minimum payment every month and continue to use your card, you’ll literally be paying off the balance for the rest of your life, with high interest costs added in.
Frequent flier miles are a big incentive to use one particular credit card, but banks don’t offer frequent flier miles out of the goodness of their hearts; they make money on these cards. The interest rates are often several percentage points higher than regular cards, so if you carry a balance it could cost you more than the value of the miles you’re earning.
Don’t accept offers for credit insurance, which covers your credit card payments if you’re too ill to work. It usually covers only your minimum payment, and the cost can be high as your credit card balance goes up. You’d be better off using the money to pay down your balance each month.
Don’t use your cell phone to place credit card orders. Cell phones are not secure, and someone could intercept your phone call and use your credit card number to run up charges. Find a landline where you can order without being overheard.
Never, ever take cash advances on your credit card except in a dire emergency (this does not include a big sale on your favorite jeans or the latest electronic gadget). Cash advances come with a hefty price tag: exorbitantly higher interest rates and high fees. The interest at the higher rate accumulates so quickly it may be difficult to pay it off. Many credit card companies apply your payments to your purchases first until you have a zero balance before crediting anything to the cash advance, so you continue to accumulate interest on the cash advance at the higher rate indefinitely.
Late payments are costly. If you pay your credit card bill even one day late, not only will you be slapped with a late payment fee of $25 to $39, but your interest rate will be jacked up too. Mark your credit card payment due dates on your calendar or use whatever method works for you to ensure that you send your payment in early enough to be processed and credited to your account before the due date.
The easiest way to make sure you pay off your credit card is to sign up for automatic payments. You can choose to have your minimum payment, the complete balance, or any other amount you would like drafted from your checking or savings account each month. This is a responsible way to pay your credit card bill because you have to plan ahead to have enough money in your account to cover the automatic draft. Talk to a customer service person at your bank if you have any questions.
Every time you move, even if it’s temporary, notify your creditors immediately of your change of address. If bills take longer to get to you or don’t get to you at all because your address is incorrect, you’ll incur late fees and possible penalties. Even though the post office will forward your mail for a limited time period, it may be delayed enough to make you miss your due date and incur a fee.
If you exceed the credit limit on your credit card, you’ll be hit with an overthe-limit fee. Unless you pay your balance down before your next statement, you’ll be hit with another over-the-limit fee every month until your balance falls below your limit. What a waste of money! When calculating how much credit you have available, don’t forget to include an allowance for the interest expense that will be added to your balance at the end of your billing cycle.
If you’re not satisfied with the quality of an item you purchased with your credit card, notify the credit card company immediately. You don’t have to pay for the item until the credit card company investigates your complaint.
The “rule of 72” tells us that 72 divided by the interest rate equals the number of years it will take your debt to double. If you have $5,000 of credit card debt at 10 percent interest, your debt will double in 7.2 years (72/10). If the interest rate is 19 percent, your debt will double in just 3.8 years (72/19). This is why you’ll never get out of debt if you just pay the minimum balance.
If you have more than one credit card and some cards have higher interest rates than others, try to consolidate to a card with a lower interest rate. More of your payments will go toward paying off your debt instead of fattening the coffers of your credit card company.
If you want to transfer your credit card balance to a card with a lower interest rate, read the fine print first. Most cards come with a low introductory interest rate that expires in several months. Make sure the rate after that period is not going to be higher than the rate you already have, or you’ll end up incurring higher interest costs and owing more.
Another reason to read the fine print before transferring your balance to a new credit card: there may be a fee for transferring, usually equal to a certain percent of your balance (5 percent for example). If your balance is $2,000, the fee could be $100 just to transfer. You might be better off applying that money to the balance of your current card.
If you have more than one credit card and you’re trying to pay one of them off, pay the minimum payment on all but the one with the highest interest rate. On that one, pay as much as you possibly can. This method saves you the most money in the long run because you pay down the balance with the highest interest rate first. This is the only time you should ever pay just the minimum payment on any credit card.
If you have more than one credit card, know your statement closing date on each card. When making a purchase, use the card whose statement closing date has most recently passed. This will give you the full use of your grace period to pay for the purchase. However, don’t use this technique if you have no grace period and interest is charged from the date of purchase, or it will cost you more instead of less.
If you mail your credit card statement one or two days before it’s due, expect to be charged a late fee of $25 to $39. To ensure your payment is credited before the due date, allow a minimum of five but preferably seven days before the due date.
You know how compound interest works with your savings account (the bank pays you interest on your principal plus interest on the interest the principal has earned). Compound interest works the same way on your credit card, but not in your favor. You pay interest on the amount you borrowed plus interest on the interest if you pay only the minimum payment, so always pay more.
When comparing credit cards, check not only the APR (Annual Percentage Rate of interest), but also the grace period. Some cards have little or no grace period, which means you’ll pay interest on your balance for a longer period of time each month, resulting in higher costs to you.
When comparing credit card deals, look for the following: the best regular (not introductory) rate, no annual fee, a grace period of at least 25 days, and late fees no higher than $20. If you plan well and always pay your bill on time, you won’t have to worry about the late fees. A few percentage points in the interest rate can cost you substantially if you carry a balance of more than a few hundred dollars.
Use a check card instead of cash or credit for your day-to-day expenses. Cash can easily be lost or stolen, whereas check cards usually offer some protection from fraudulent use if you report their loss or theft immediately. Check cards also enable you to review your expenditures online, making it easier for you to track your expenses and know where your money is going.
After you’ve had your credit card for a year or so, call your credit card company and ask for a lower interest rate. Competition for cardholders is fierce, so your credit card company wants to keep you as a customer (assuming, of course, that you pay your bills).
Always check your credit card or other statement as soon as you receive it. Compare each charge to your receipts and verify that the amounts are correct. Make notes of any payments you’ve made or credits you’re expecting and make sure they appear on the bill when they should.
If you have bad credit, you’ll be an ideal candidate for car dealer scams. You’ll be told you must purchase credit life insurance or an expensive extended warranty in order to qualify for a car loan. Familiarize yourself with popular car dealer scams at www.carbuyingtips.com so you can protect yourself.
If the due date of your credit card bill doesn’t coincide with the dates you get paid, call the credit card company and ask them to change your due date. You’ll avoid the expense of chronic late fees, which add up very quickly.
Understanding the difference between charge cards and credit cards can save you money. Charge cards give you the convenience of paying for your purchases without cash, but require you to pay the balance in full each month. Credit cards offer revolving credit. As you pay for the credit you’ve used, it automatically becomes available to you again. The interest charge on any balance you don’t pay by the due date is the cost to you.
The fewer credit cards you have, the easier your bill paying will be each month and the easier it will be to track your expenses. One card equals one bill. Having three to five credit card bills each month, all due at different times, is asking for trouble. At some point you’re sure to miss a payment and get hit with a whopping late charge.
If you have trouble obtaining a credit card because you’ve had bad credit in the past, consider a secured credit card. These cards require a deposit or are tied to a bank account in which you’ve deposited an amount of money equal to your credit limit on the card. Fees and interest rates are usually higher on secured cards, but they can help you rebuild your good credit.
The credit card with the lowest interest rate is the best deal, right? Not necessarily. Look at the overall costs and how you’ll use the card. For example, if you’re going to pay the balance off each month, the interest rate is less important than the annual fee.
According to a survey by Bankrate, the average interest rate of college students’ credit cards was 17.66 percent for purchases and 19.67 percent for cash advances, at a time when the average credit card rate in general was 8 percent. Don’t make the mistake of signing up for credit cards with these exorbitant rates.
The credit card companies’ offer of free phone cards or other “free gifts” is a lure to get you hooked on credit. Don’t sell yourself so cheaply.
Having more than one credit card probably means paying more than one annual fee. If you have six major credit cards at an average annual fee of $35, that’s $175 you could save every year by closing five of the accounts. If your annual fees are higher, you’ll save even more by consolidating.
Look at the big picture when choosing and using credit cards. Rebate credit cards (frequent flyer miles, cash back, etc.) only benefit you if you don’t carry a balance. If you do, interest costs will more than erase any gains you receive in rebates.
Don’t pay for tuition, room and board, or textbooks with credit cards unless you’re sure you’re going to be able to pay the balance off very soon. Otherwise you’d be better off in the long run to take out a student loan, for two reasons: one, the interest rate is much lower on student loans; and two, you can deduct some of the interest expense on student loans. Interest on credit card debt is never deductible for income tax purposes.
Use one of the many online tools to help you decide which credit card is the best deal: a higher interest rate card with no annual fee or a lower rate card with an annual fee. One such calculator can be found at www.financecenter.com/cards.htm.
If you carry a balance on your credit card, you can save money by paying the bill the day it arrives rather than waiting until the due date. When you carry a balance, interest is calculated from the first day of the purchase; there is no grace period. The longer you wait to make your payment, the more interest will accrue.
Make a point of looking at the finance charge on your credit card statements every month. This reality check may make you pause the next time you’re tempted to pay with plastic.
Call your credit card company and ask them to lower your interest rate. If you have a good payment history, your request will often be granted. Talk about easy ways to save money!
Lenders aren’t the only ones leery of people who have lots of available credit but limited income, like most college students. Landlords and businesses don’t want to be left holding the bag if you run up credit card debt you have no way to repay, so these businesses may charge you higher prices or require higher deposits in order to protect themselves. You can avoid this by having lower credit limits.
Getting into credit card debt in college may increase the time it takes to get your degree and how much your education costs in the long run. Studies have found that students with credit card debt are often forced to reduce their class load so they can work more to make their monthly credit card payments.
When you use a credit card, the merchant has to pay a fee of 2 to 4 percent to the credit card company, which reduces his profit. Pay cash and ask for a cash discount on large items. You may or may not get one, but it doesn’t hurt to ask.