Be Smart and Safe about Credit Card Debt
Twelve Things Your Credit Card Company Doesn’t Want You to Know
A fixed-rate card is not really a fixedrate card. Legally, the credit card company can jack up your interest rate even on a “fixed-rate” card as long as it informs you fifteen days in advance, so there’s no guarantee the rate will stay fixed for any longer than that. Read the notices that come with your monthly statement to make sure you don’t miss a rate change announcement. This will give you time to shop around for a new card with a better rate if your credit card company announces an increase.
The blank checks your credit card company occasionally sends you to use at any business that accepts your credit card come with an outrageously high interest rate. What’s worse, most credit card companies apply your payments to your regular balance until it’s at zero before they apply even one penny to the balance you incurred from using the blank checks with the higher rate. That means if you always carry a balance on your credit card, you could still be paying higher interest rates on the funds from the check fifteen years from now. The checks are also easy targets for theft, so shred them as soon as you receive them and toss them in the trash.
Those “skip a month’s payment” notices you get from your credit card company because you’ve been such a good customer are not really a favor. You’ll continue to accrue interest during the “free” month and will end up paying more interest than if you had made your regular monthly payment. Try to resist these tempting offers to skip payments.
Typical monthly minimum credit card payments are approximately 90 percent interest (income to the lender), and only 10 percent principal (reducing what you owe). Low minimum payments are not a favor the credit card company provides because they like you. They’ll enslave you to the credit card company for the rest of your life, so always pay more than the minimum.
Zero percent interest credit card offers are a sales ploy. The interest rate will go up, and may be higher than the rate on a card that doesn’t offer zero percent for an introductory period. Read the fine print to make sure you know exactly when the introductory rate expires, and take the offer only if you’re positive you can pay off the balance before that date.
Cash advances on your credit card are an expensive way to borrow money. Besides the one-time fee of 2 to 4 percent of the amount of the cash advance, the interest rate is usually 2 to 6 percent higher on cash advances than on credit card purchases. In addition, there’s usually no grace period on cash advances, so interest begins to accrue immediately.
Premium credit cards, like Gold and Platinum cards, are often not worth the additional fees you pay for them. In return for an annual fee that is two to three times that of a standard card, plus higher interest rates, the benefits you receive (discounts, cash back, travel upgrades, special insurance, or some other perk) are often worth less than what you paid for the “privilege” of having the card. These color descriptions appeal to your need for status but they do very little for you financially. A regular card without the fancy-sounding name is usually the best choice for students who carry a balance.
Credit card companies offer cobranded affinity cards that contain the name and logo of your school, your favorite sports team, or charitable organization in return for providing commissions (kickbacks) to the organization. Don’t consider the cobranding in your decision about which credit card is best for you; look only at the financial considerations. It doesn’t make sense to pay higher interest rates or higher fees just to have a name or logo on a credit card you hide away in your wallet. Even though you receive perks, the money comes out of your pocket in one way or another.
As of 2003, the average credit card debt for undergraduate students was $3,262. Making the minimum monthly payment of $81 at 18 percent interest, it will take more than twenty-two years to pay off the balance if you never charge another penny. By the time you pay it off, you will have repaid more than double what you borrowed. Does this make sense to a smart college student like you?
The credit card companies that line up on campus to hand out credit card applications aren’t there because they want to do you a favor by issuing you a credit card even though you may not have a job. They are there because having you and your fellow students committed to them at a young age is worth the millions of dollars in fees they pay your college, at your expense, to set up camp in the places where you hang out. Many colleges also get a percentage of every dollar you ever spend on credit cards you signed up for on campus.
If you carry a balance on your credit card, rewards cards like cash back or frequent flyer miles may cost you more than you’ll gain in benefits because these cards have higher interest rates. Sign up for a rewards card only if you’ve proven your ability to pay off your balance every month, and consider the perks as a reward for your good behavior.
Think about why a credit card company would give a credit card to someone with no job and no (or very little) income. Either they think your parents will bail you out if you get into debt, or they think you’ll become enslaved to credit card debt while you’re young and inexperienced and they’ll own you for life. Make them wrong on both counts. You’ll graduate far ahead of your peers financially if you stay out of credit card debt.