Used properly, credit is an excellent tool. Used carelessly, it'll bury you. Follow the Fool's rules of credit management to deal yourself a better hand with every dime you borrow.
Crossing the credit line Not surprisingly, lenders' promiscuity is catching up with them. Subprime lenders -- who built their businesses by pursuing the un-creditworthy -- are getting squeezed by their customers. Job loss and other consumer hardships are affecting these bankers' bottom lines. Subprime lenders are writing off losses in the 15% to 17% range, versus the average industry loss rate of 6.5%. Delinquency rates now average about 10% while those for the rest of the lending industry average just 5%. In the past year, some big-name banks have been dealt pink slips of their own. It's not just the bottom-feeders feeling the pinch. Response rates to directmail solicitations are shrinking. Charge-offs are on the rise. Bank credit card issuers lose about $1 billion each year in fraud, reports CardWeb.com. They lose another $3 billion annually in fraudulent bankruptcy filings. And we're not even talking about the number of Americans who legitimately filed for bankruptcy. Your credit crunch So what does any of this have to do with you? Great question. The more you know about your creditors, their competition, and your borrowing peers, the better off you'll be. After all, if you're going to use credit cards --
and who isn't -- you might as well make sure the cards you've been dealt are good ones. You'll find everything you need to assess your credit situation, improve it, or simply find fodder to gloat about at parties ("Hey, baby, guess what my FICO score is.") in our comprehensive Credit Center. We'll show you how to manage your credit Foolishly, teach you how lenders officially keep score, and walk you through every step it takes to get out of the credit crunch, if you're currently struggling. It all boils down to knowing what's in your wallet -- how much, at what interest rate, to whom it is owed, and how it affects the rest of your financial life.
Debt Management
Adios to Your Debt
Digging yourself out of debt is not an easy task. It will take hard work and determination, but it can be done. Bankrate's tools and tips can help make it a little easier.
Goodbye debt! By Bankrate.com
The burden has been taking its toll. You don't sleep well, your back hurts and you can't imagine ever having the freedom to retire. You must get rid of your debt. It is not impossible, but it will take hard work and determination. Do you have it in you? Yes, you do. Good debt and bad debt Do you know the kind of debt you've incurred? Find out if it is good or bad.
Good debt and bad debt By Larry Getlen • Bankrate.com
Debt is a concept as intricately intertwined with America these days as baseball, mom and apple pie. The amount of personal debt in this country is ever increasing, and a large part of the reason is that credit has never been easier to get. Whereas credit card issuers previously looked for customers who could repay, today card issuers relish the chance to reel in those who'll continuously charge beyond their means at 18 or 20 percent Get out of debt: Create a spending plan Your brain is a computer, but it needs more memory. At least in the beginning, use a written guide to track your cash.
Create a spending plan
If you always skid into your next paycheck, you'll be left weeks, months, or years short of your financial goals. Get organized, and develop a spending plan. A spending plan helps you get to know your money flow -- money earned and money spent. Keep it simple! Create two charts: one for your income, the second for your expenses. Divide expenses into two categories: fixed expenses, such as mortgage, rent, or car payment; and flexible expenses, such as utility bills, groceries and gas.
For one month, record your income and all your expenses, cash and credit -- yes, even those pocket-change coffee and doughnut runs! At month's end, tally up what you spent your money on and compare it to your income. Surprised? Now it's time to organize your bill paying and economize your flexible spending. Where can you cut back? Your flexible spending needs to fund your emergency savings and your "debt pay-off plan." Here's more information on setting up a budget. Pack away your debts with the payment push Your good, bad and indifferent debts are all mixed up and you can't tell which is which. Just rank them by interest rate with highest at the top and start chipping away.
Pack away your debts with the payment push
By Bankrate.com Want to know what the big moneymaker is for credit card companies? Fees (read: your money). Last year, 31 percent of the industry's profits came in the form of late-payment fees, over-limit fees and the like. If you are like the average American family, your total credit card debt is around $8,100. If you were to stop charging altogether and pay only the minimum amount due on this amount, it would take about 30 years to get rid of it. No one wants to hand over cash to the credit card companies, but by paying only the minimums or falling behind a couple of months here and there, you are lining their pockets with profit and limiting your opportunities for enjoying life. Bankrate.com to the rescue. Use the "Payment push plan" to methodically dissolve your debts. Here's how it works. 1. No new debt Put away the credit cards; borrowing is no longer an option. Even when you know you deserve something, you can't have it until you can afford to pay cash for it. 2. It's a head game A daily affirmation helps to program your mind for success; post this on your bathroom mirror: "By living frugally, we will have the cash necessary to pay off our debts in ___ months instead of ___. The $______ we save in interest will be put into savings so we will always have enough to pay the rent and weather any lean periods in the future." Check out this calculator to determine how quickly you can be debt-free and how much you'll
save in interest fees. Use the facts to write your bathroom-mirror mantra. 3. Prepare a debt repayment schedule Use our debt repayment worksheet. Include columns for the name of the debt, balance due, interest rate, current payment and "Payment Push" period. Rank the debts by interest rate, with the highest one on top. Add a line under each debt to describe how you're going to fund the "Payment Push." The "Payment Push" gets applied to one debt at a time: Continue to make the same monthly payments on all debts except the one getting the "Payment Push." 4. Start at the top Apply the "Payment Push" strategy to the debt on the top of the list: All extra, available cash is used to pay down the debt with the highest interest rate, first. That includes raises, 60-SECOND GUIDE TO ...Getting Out of Debt Picture yourself bonuses, belt-tightening and that $20 bill that unexpectedly popped up. Push hard at the rest of them. When the first debt is paid off, use the cash that is freed up to pay down the next debt on the list. Be on the lookout for new ways to cut costs and bring in more money. The sooner a debt gets paid off, the sooner you can push hard at the next one on the list. (Looking for some cost-cutting strategies? Check out these great tips for living frugal while still enjoying life.)debt-free -- no more bouts of anxiety over mounting credit card balances, no more slavery to your debt, and no chance of threats from the dreaded collection agency. You can do it! Here's the scoop -- in one minute flat. 0:60 Resolve to spend less than you make Make it a habit as fundamental as stopping for red lights. Realize once and for all that if you can't pay for it today then you can't afford it. 0:55 Distinguish between Bad Debt and OK Debt OK Debt has an interest rate well under 10% -- preferably with some tax advantages to boot. In the best case, the thing you bought with borrowed funds will appreciate in value. Home mortgages and student loans are examples of OK Debt. Automobile loans are on the borderline: They often satisfy the low-rate piece, but automobiles almost never appreciate in value. Bad Debt is everything else -- from your titanium credit card to the 35% loan from Larry's Kwik Kash. 0:50 Pick a winner Pick the one major credit card that features the lowest annual interest rate. Cut up your other cards, including all department store cards, into lots and lots of little pieces. (If you have plenty of ventilation, you can try to set the plastic shards on fire.) Resolve to use the one card left intact for emergencies only.
0:41 Gather the latest bills from all Bad Debt accounts Line these up on the kitchen table. Find the minimum monthly payment for each account and then add these up to get an overall monthly minimum. Pledge to pay this overall minimum PLUS a hefty additional chunk every month -- enough to make a solid dent in the outstanding balance of at least one account. If you can't pull this off, you'll have to make a drastic move to increase your income or lower your expenses. It's harsh, we know, but it's also an inescapable fact. 0:34 Pick the highest interest rate account and attack! Lather, rinse, repeat Next, order the latest bills according to annual interest rate charged. Apply the "hefty additional chunk" (beyond the minimum) to the highest rate account(s). Repeat monthly until the last Bad Debt account is paid in full.
0:26 Ask for a lower rate Grab a bill from any account charging you more than 14% interest. Dial the toll-free number on the bill and ask to have your rate lowered to 11%. Tell them that you'd really like to stay with them out of customer loyalty (embellish according to your acting skills), but that you have received offers for much-lower-rate cards. Expect to be made very uncomfortable, but stand firm and remember that, to them, you are both a customer and a profit center. You also stand to save a bundle. The more calls you make, the more persuasive you'll get. 0:18 Be prudent Be aggressive in paying down Bad Debt, but don't get so ambitious that you risk missing minimum payments on your mortgage, automobile, or any other secured credit account. (Secured means that if you miss enough payments, the bank can show up and take your stuff.) 0:12 Spend time on our Consumer Credit / Credit Cards discussion board You'll find plenty of emotional support and great ideas. Help others celebrate their debt-free "happy dance." 0:05 Dance, Fool! You're done when the Bad Debt is 100% exorcised and you can make remaining OK Debt payments with ease, leaving plenty of budget room for savings.
Credit Card Management Wise Credit Card Use
More Credit Basics
Credit Report Basics When to Get a Credit Report Obtaining a Credit Report Reading Your Credit Report Avoiding Over-Inquiries How to Fix Errors
Repair Your Credit Credit Repair Services Credit Counseling Services
To find the right credit card for you, it helps to determine how you use credit. Although some are saddled with thousands of dollars in debt and others pay off their balances fastidiously, most of us are somewhere in between. Here are three card-user profiles: Card User A puts all her monthly charges on her card. She pays the entire balance every month before the due date. Because she pays her bills before the grace period ends, she pays no interest expense. The best credit card for her is one with no annual fee. A frequent-flier-miles or other rewards card may also make sense. For an annual fee that usually ranges between $75 and $100, she can likely earn enough miles or rewards points to make the decision economical. Card User B has average monthly balances of $5,000. He regularly transfers his balances to new cards that offer teaser-rate programs. He pays an average interest rate of 15% on his cards, or $750 a year in interest. His best strategy is to find and keep a low-fee card that offers a regular rate lower than the current average rate he pays. For example, if he could find a card that would allow him to consolidate his balances at 12% for a $50 annual fee, he could cut his yearly interest expense by $100. Card User C has average monthly balances of $1,000 and pays a $25 annual fee. His current card rate is 14%. This costs him, on average, $140 a year in interest. He's evaluating a card offer with a 10% rate and $50 fee. Is the lower rate worth the higher annual fee? With a $1,000 average balance it is. The new card will save him $40 in yearly interest expense and cost him $25 more, for a net savings of $15. However, as Card User C begins to pay off his balance, the decision to stay with his current card becomes the better decision. With a $500 average balance, for instance, his yearly outlay with his current card is $70 in interest plus the $25 fee, or $95. The yearly outlay for the alternative card would be $50 in interest plus the $50 fee, or $100. Of course, changes in interest rates will change the dollar savings and costs but the basic relationships remain. As your average monthly balances decline, a difference in interest rates, or spread, between two cards will matter less. If you're more like Card User B or C, you may want to setup a repayment plan. You can start by calculating an average yearly balance for each of your cards. To do this, you take the average of your average monthly balances over a 12-month period. You may find this step to be helpful, since most of us spend more at certain times of the year than other times.
Month Example Jan. Feb. March April May June Ave. Yearly Balance $1,000 $1,300 $1,000 $1,050 $1,250 $1,300
Your Your Month Example Balance Balance July Aug. Sept. Oct. Nov. Dec. $1,200 $1,300 $1,500 $1,400 $1,700 $1,900 $1,325
After doing this for each card, calculate a weighted-average interest rate of all your card debt. Consider using a table similar to this:
Credit Card A B Total
Ave. Yearly Balance $1,325 $1,000 $2,325
Percent. of Interest Annual Total Rate Fee Card Debt 57% 43% 100% 15.0% 12.0% 13.7% $20 $40 $60
After calculating the average-weighted rate, estimate your future card use. To have a successful repayment plan, remember, you need to pay more than what you charge. Determine how much you can pay each month by reviewing your personal cash flow. Be sure to include in that estimate of cash outflows the amount of your future monthly charges. Be sure to pay off the higher-rate card debt first. Finally, you should review and update your repayment plan every six months or so. This allows you to see if you're making satisfactory progress. If you're better off, great: keep going. Consider a faster repayment plan. If you're worse off, you may want to consult a credit counseling service. The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Credit Card Management Using your credit report
When you apply for a credit card, the card company submits an inquiry to a credit bureau to obtain a copy of your credit report. The credit report contains your credit history, which will be used to help it make a credit decision. Your credit report reveals your credit score. The card company uses this information, along with other lending criteria, to make a decision. Contrary to common belief, lenders do not base their credit decision only on your credit score. Additional myths about your credit report include: Your credit report is a single report. The three major credit bureaus are Experian, Trans Union and Equifax. These are also called national data banks or consumer-reporting agencies. Information on the major three credit bureaus is shown below. Your credit reports are accurate. Errors, omissions and discrepancies often exist between your credit reports from each of the three bureaus. The longer your credit history, the greater the chance of these occurring. As a result, it pays to review all three credit reports every year or so. If you find incorrect information, contact the creditor directly to have it fixed. Credit inquiries don't "ding" a credit report. Each time you apply for credit, the creditor obtains your credit report. Not doing so would constitute the creditor's failure to perform due diligence. These inquiries show up on your credit report. Although lenders may forgive a lot of inquiries that tend to occur when you buy a car or home, excessive inquiries from credit card companies is frowned upon. Major credit bureaus:
Equifax
Experian
Trans Union
(800) 685-1111
(888) 397-3742
(800) 888-4213
www.equifax.com www.experian.com www.transunion.com
The Fair Credit Reporting Act (FCRA) protects you if you've been denied credit. The law requires a lender that denies credit to a consumer based on a credit report to: Notify the consumer of the decision to deny credit. Explain the item in the credit report that led to the decision. Identify the credit bureau or bureaus that furnished the credit report. Authorize the consumer to obtain and dispute a free credit report from that bureau. You have 60 days to request the credit report. The credit bureau is required to notify you of your claim and correct any errors within 30 days. The law was amended in 1997 to add further protections from potential abuses of credit bureau information. The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser
Updated: 2005-02-25 13:38:13 Credit Card Management Using reward cards
Some credit-card companies offer rewards cards, which can be used to earn a free airline ticket. These rewards cards are called frequent-flier-miles cards or flight cards. With these cards, a card company and airline join forces. You earn miles with the airline's mileage program whenever you use the card for new purchases. Most frequent-flier-miles cards accrue miles at the rate of one mile for each dollar in new purchases. Often, you receive a few thousand miles when you join the program. After spending $20,000 to $25,000, you redeem your miles for a free ticket on the participating airline. The standard reward is a round-trip economy-class ticket for travel in the U.S. Frequent-flier-miles cards charge an annual fee that usually ranges from $50 to $100. Some cards may award miles for transfer balances. Most of the card programs limit the number of miles you earn in a year. To help you decide whether a frequent-flier-miles card is a good deal, compare the cost of earning a ticket with the rewards card versus buying the ticket at the current price. Your cost depends, in part, on how you use your card. For example, let's say you visit your relatives on the West Coast once a year. The current price for a roundtrip airline ticket is assumed to be $500. You're evaluating four flight card offers, shown below:
Card A Card B Card C Card D Interest rate 16.0% 14.0% $1,000 12.0% $1,000 10.0% $1,000
Ave. Monthly $1,000 Balance
Ave. Yearly $160.00 $140.00 $120.00 $100.00 Interest
Annual Fee
$50
$50
$50
$50
Total yearly $210.00 $190.00 $170.00 $150.00 cost
Each card requires 25,000 miles to earn a free ticket. Each has a $50 annual fee, and the most you can earn in a year is 10,000 miles. You charge at least $10,000 a year in purchases. The yearly limit of 10,000 miles rules out a free ticket until the third year. Nevertheless, if you pay off your card balances every month, your only expense is the annual fee. In this case, any of these card offers are a good deal. Your total outlay is only $150, well below the current ticket price. Next, assume that you have an average monthly balance of $1,000. In this case, Card D is the only profitable decision, based on current interest rates. Card D costs you about $450 over the next three years to earn an airline ticket worth $500. The next-cheapest card, Card C, would require spending $510 over the same period, or slightly more than the airfare. If your average monthly balances were $2,000, however, none of the cards would reach the break-even point. Again, this analysis is based on current interest rates. Rates may rise or fall, and the price of West Coast airfare in three years may also be different. However, this kind of analysis can help you to understand the pros and cons of using a frequent-flier-miles card. In addition to frequent-flier-mile rewards, there are also cash and merchandise rebate cards. You should treat these cards in a similar fashion as frequent-flier-miles cards, carefully reading the terms and conditions of the card offer. The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Updated: 2005-02-25 13:38:00 Credit Card Management Dealing with card offers
Credit card offers frequently use teaser rates to acquire new customers. These are introductory rates that last a few months before the regular interest rate kicks in. Some of the attributes of teaser programs include: Length of time the rates are offered. Teaser rates generally last only a few months, perhaps three to six months. Be sure to ask the card company what the regular interest rate will be when the introductory period expires. New purchases. Teaser rates often only apply to new purchases made with the card. If you're attempting to improve your credit, however, the last thing you may need are further enticements to spend. Transfer balances. Teaser rates that apply to transferred balances offer some temporary relief from higher interest rates. For example, if you transfer $5,000 in balances to a new card that charges 2.9% for six months from a card that charges 15%, you can save $300 in interest. Be sure to ask what the regular rate will be when the intro rate expires. It may be higher than the rate on your current card. Rate escalations. After an introductory period expires, the rate on your card is bound to escalate. The question is whether it will be a higher rate than the rate on your current card. If so, you'll begin to lose that $300 you saved during the introductory period. Worse, the low intro rate on new purchases may have led you to actually increase the amount you owe. Intangible costs of card surfing. Some card users actively take advantage of introductory offers, transferring their balances to a new card when the offer expires. This technique of "surfing" your balances
may work for a while, but it's likely to catch up with you. The time and effort spent doing this may begin to take a toll. You may wind up mistiming the offer, paying a rate that is much higher than your current rate. You may also simply run out of introductory offers. A card company that you've left once before is unlikely to extend another introductory offer to you. Finally, surfing your balances doesn't address what may be the core problem: failure to repay your card debt. The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Updated: 2005-02-25 13:37:57 Credit Card Management Credit laws protecting you
The following consumer-protection laws help with credit-related matters: Fair Credit Reporting Act. The Fair Credit Reporting Act (FCRA) requires a card company or other creditor that denies you credit based on information in your credit report to: Notify you of its decision to deny you credit. Explain the item in the credit report that led to its decision. Identify the credit bureau that provided the credit report. Authorize you to obtain a free credit report from that bureau and to dispute the item.
You have 60 days to request the credit report. If you dispute an item, the credit bureau has 30 days to notify you and correct any errors. The law was amended in 1997 to add further protections from potential abuses of credit bureau information. A common mistake on credit reports is inaccurate information, such as showing the incorrect number of late payments. Another common mistake is reporting as your debts those belonging to another person with the same name. If a credit report dispute is not resolved to your satisfaction, visit the Web site of the U.S. Federal Trade Commission (FTC) for additional information. Equal Credit Opportunity Act. This law prohibits a card company or other creditor from denying you credit based on your sex, race, age, religion, marital status, national origin or receipt of public assistance. You are entitled to receive an explanation if denied credit. Fair Credit Billing Act. This law protects you from unauthorized charges made to your credit cards or other types of revolving credit. You have 60 days to notify the creditor, which must acknowledge receipt of your notification within 30 days. The creditor must resolve your dispute within two billing cycles, which are usually months. Fair Credit Debt Collection Practices Act. This law prohibits a collection agency from harassing, intimidating or using abusive tactics to collect amounts you may owe. Collection agencies may not contact you at work if they know your employer disapproves. Moreover, collection agencies are limited to contacting you between the hours of 8 a.m. and 9 p.m. The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Updated: 2005-02-25 13:38:02 Credit Card Management Credit card fees
It may be cheaper to pay an annual fee if the interest rate on your card is low enough. Annual fees generally range from $20 to $75. To decide, you need to calculate which is cheaper: a fee-based card with a low interest rate, or a no-fee card with a higher interest rate. Let's look at two cards. The first card has a $25 annual fee and a simple interest rate of 13%. The second card has no annual fee and an interest rate of 15%. If you pay your balances in full every month, you pay no interest. If you are thrifty enough to have no monthly balances, the no-fee card is clearly the better deal. However, if your average monthly balance is $5,000, the no-fee card would cost you an extra $100 ($750 $650) a year in interest:
Ave. Monthly Balance $1,000 $1,000 $5,000 $10,000
13.0% $130 $130 $650 $1,300
15.0% $150 $150 $750 $1,500
In this case, paying a $25 annual fee is the better deal. You save $75 ($100 in interest minus the annual fee) a year. If your average monthly balance is $10,000, the fee-based card would save you $175 a year. There are other fees to watch for. Credit card companies routinely charge fees on cash advances. These fees are usually imposed at the card's ceiling rate. There is seldom, if ever, a grace period on cash advances. This means you begin paying interest on those amounts immediately. Card companies also charge hefty fees on any charges that temporarily exceed the amount you are allowed to borrow. Like cash-advance fees, these are fees that you pay for the privilege of having access to credit that is more than your borrowing limit. These kinds of charges should be avoided, if at all possible.
Updated: 2005-02-25 13:37:53 Credit Card Management Consolidating your cards
If you make payments on several credit cards, you may want to consolidate your payments into one card. Consolidating your credit cards has some great side effects. For one, it adds discipline to your spending. Keeping a running tally on one card is much easier than trying to do the same with five or six cards. You also write fewer checks to credit-card companies each month. The real potential benefit of consolidating your credit card, however, is improvement in personal cash flow. For one, you avoid paying multiple annual fees. You may also be able to roll up several high-interest-rate cards into a card that has a lower interest rate. To see whether consolidating your credit cards is a good deal, calculate the weighted-average interest rate for all of your card debt. This is easier to do than it sounds. Then, add the annual fees that you pay for each card.
Finally, compare these costs to your consolidation offer. For example, assume you own the following four credit cards:
Card A Card B Card C Card D Interest rate 17.5% 16.5% $1,000 16.0% $1,500 15.0% $1,000
Ave. Monthly $1,500 Balance"
Ave. Yearly $262.50 $165.00 $240.00 $150.00 Interest Annual Fee $25 $25 $25 $25
To calculate, divide the total yearly interest expense of the four cards by the total of average monthly balances. These are the sums of the third and second rows, respectively. Thus, your weighted-average interest rate is ($817.50 / $5,000), or 16.35%. In addition, you presently pay $100 in annual fees. You could lower your bills if you find a card that: Accepts your $5,000 of debt as transfer balances and charges you a rate that is less than 16.35%, and Charges a rate of 16.35% or lower on new purchases, and Has an annual fee of $100 or less (unless the interest rate on the consolidation card is low enough to justify the higher fee). The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Updated: 2005-02-25 13:37:50 Credit Card Management Checklist of card features
To help compare and evaluate your existing credit cards, as well as card offers, you may wish to set up a checklist. A checklist includes the basic and essential features of a credit card discussed in this educator. You may wish to expand the checklist to evaluate introductory offers and rewards cards. Although the checklist may contain other features, it should include, at a minimum, the following information:
Feature Regular interest rate: Index rate: Interest rate spread:
Example A 14.50% Prime 4.00%
Example B 17.50% Prime 9.00%
Your Card
Cash-advance charges: Over-the-limit charges: Annual fee: Grace period (days): Teaser rate: On new purchases: On transfer balances: Introductory period: Regular rate on transfer balances: Rewards card: Reward earned: How reward is earned: Reward on transfer balances: Bonus offer: How many needed for reward: Reward description:
21.00% 21.00% $35 25 Yes 3.90% 3.90% 6 months 16.50% No ------
21.00% 21.00% $30 25 No ---17.50% Frequentflier Miles 1 mile/$1 purchases 500 miles each $1,000 1,000 miles first 3 years 25,000 miles Round-trip ticket (domestic)
--
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Updated: 2005-02-25 13:38:05
Credit Card Management Calculating card interest
The average daily balance method is usually used to calculate the interest you owe on your credit card. To calculate, add your daily balances for each day in the billing period and divide by the number of days in the period. For example, if your daily balances for a 30-day period totaled $30,000, your average daily balance would be $1,000. If your credit card rate was 12%, the periodic interest rate would be 1%. One percent of $1,000 equals $10. This would be the amount of interest you would owe for the month. The Federal Reserve discusses two alternative methods. These are the previous balance and adjusted balance methods. The previous balance method calculates the interest you owe for your balance at the end of the previous billing period. For example, if your billing period ended on March 20, your next bill would be for the period ended on Feb. 20. The adjusted balance method subtracts any payments since the end of the previous period to calculate your interest. Card companies give you a grace period on new charges before you owe interest. This is usually between 20 and 25 days. However, a grace period may only apply if you pay your balance in full. Check with your card company to find out how long your grace period is, and whether it applies only if your balance is paid in full. The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Updated: 2005-02-25 13:37:49 Credit Card Management Basics of card rates
Some basic rules of interest rates on credit-card debt include: Interest rates are variable. Credit card rates are set by adding a spread, or margin, to a base rate. Your base rate is often a widely used index rate, which is almost always a rate that changes periodically. The spread that is added to calculate your rate depends on your credit history. If you pay your bills consistently and on time, the spread may be as few as 2 or 3 percentage points. If your credit history reveals that you make late payments, or have too much debt, the spread may be 5 or 6 percentage points or more. Rates are higher than those for secured loans. Credit card rates are higher than those on home equity loans, in part, because they do not have collateral. Lenders face more risk in providing unsecured credit than they do with secured credit. If you are establishing or repairing credit, consider applying for a secured card. The stated rate is not your actual interest rate. The advertised rate on a credit card is often the card's simple interest rate. The effective interest rate, however, is your true cost of borrowing. It should include annual fees you pay to use the card. The compounded interest rate is a better barometer of your effective interest rate. For example, if your card has a rate of 12%, your monthly rate would be 1%. Because credit card interest is compounded monthly, the effective annual interest rate on a 12% simple-rate card is 12.68%. Interest rates have a ceiling. Credit cards generally have a maximum interest rate, or ceiling. If you are delinquent in making payments, your card company may seek to automatically impose the ceiling rate, which can be devastating if you have thousands of dollars in card balances that are affected. Be sure to read the agreement with your card company to see what your ceiling rate is (often, it is 21%), and what terms may result in you having to pay the ceiling rate. Some states have usury laws that limit the ceiling rate that lenders can charge borrowers in that state. For example, Arkansas limits the ceiling rate on loans to 5 percentage points over the discount rate. As a result, Arkansas banks typically offer the lowest-rate credit cards in the nation.
Interest on credit card debt is not tax-deductible. Unlike a home equity loan, you cannot deduct the interest you pay on a credit card from your taxable income. Thus, if you are in the 25% income tax bracket and have a 10% rate, your after-tax rate is also 10%. Your after-tax rate on a home equity loan, however, is 7.5%. The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Updated: 2005-02-25 13:38:09 Credit Card Management Applying for cards online
The Internet lets you easily compare credit cards and apply online. It's also easy to be swayed by teaser rates of as low as 2.9% to 3.9%. These interest rates are introductory rates that last a few months before the regular interest rate kicks in. Some teaser-rate offers are valid only for new purchases while others may also include transfer balances. To help you sift through credit card offers and make a well- informed decision, consider evaluating the following features of an offer: Interest rate. Ask what the card's APR is, and if the annual fee is included in the calculation. With credit cards, the annual fee is often excluded. In that case, the APR will tell you what the regular rate is after a teaser rate ends. Ask how interest is calculated, and what events would automatically escalate the rate to the ceiling rate. You should also determine the interest rate on cash advances or charges that exceed your borrowing limit. Generally, these rates are at the ceiling rate. It is customary for no grace period to be provided for either of these kinds of charges. Fees. If you have a solid credit history, you can often negotiate the annual fee. If the card company refuses and you're adamant about paying no fee, you can always shop for a no-fee credit card on the Web. If you have substantial average monthly balances, however, a small annual fee may be a fair price to pay for a lower rate. Keep an eye out for other fees, such as those for cash advances or over-the-limit charges. You're already likely paying the ceiling rate for these charges. Charging an additional fee is a way that unscrupulous card companies may add to your cost of those kinds of charges. Ease of credit approval. Be aware of card offers promising "pre-approved" credit. You may be a prospective customer, but you still have to apply for credit. Each time you apply, the card company obtains a copy of your credit report. These all count as inquiries that, if concentrated over a short period of time, can negatively affect your credit score. Security and privacy. Limit your online application to card companies that use industry-standard practices for security and privacy. Look for 128-bit encrypting, which scrambles your application data and requires a descrambler to read it. The card company's Web server should use Secured Sockets Layer (SSL) technology. Look for an online application on a secure screen of the Web site. This is usually identified with a padlock or similar icon, or has a URL that begins with the word "https." The company should also clearly state its privacy policy for handling your financial data. Unauthorized credit card use. Check to see if the card company limits your liability for unauthorized charges. Often, the most you're liable for is $50. An unauthorized-use guarantee is added protection to the card company's security and privacy measures, above. These are some of the main features to look for in credit card offers. Unfortunately, these features are often ignored in credit card ad campaigns. The more you do to evaluate a credit card offer before applying, the sharper your credit management skills. The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.