Suppose that you receive a bill from your card issuer this month for charges that you made last month for a refrigerator - let's say $1200. You send a check as payment for $600, half of the charges. In the next month, when the bill comes for $600, how much will your finance charges be based on? Only the $600 that you owe?
The previous $1200 plus the $600 remaining.
How can banks get away with this? Congress tells them that they can. (Congress oversees banking issues.) There are no laws against it. You can be charged interest twice on the same dollar. Nice business practices the banks have. Would you like to charge your customers one and a half times for the work that you do just once?
Before applying for any credit card, ask the card issuer whether they have double-cycle or dual-cycle billing. The largest companies do. Look for one that does not. You will save yourself a pile of money in the end if you are not in the habit of paying off your balances every month during your grace period.
You have almost unlimited opportunities to say "yes" to bad ideas. Don't make this one of them by taking a credit card from a cardsharp.
Showing posts with label Credit Card. Show all posts
Showing posts with label Credit Card. Show all posts
Sunday, April 27, 2008
Thursday, April 24, 2008
The Real Cost of Credit Card Debt
I was astounded not long ago when I discovered how much a $5000 credit card balance actually costs the cardholder over time. (I like doing this weird kind of calculation stuff.) Follow this math down the rabbit hole.
If you have a card with a $5000 balance at 18% and make $100 payments each month, what do you think is the final tally to retire your balance and how long will it take to pay off?
Assuming you make no other charges after you begin to whittle away at the debt, it will take you 93 months, almost 8 years, for a grand total of $9300 paid out. That's an unbelievable $4300 in interest.
Now, if you were to invest $100 each month instead, in a mutual fund that grows at a modest 8% annually, in the same approximately 8 years, you would have $13,400.
To finance $5000, it will cost you $8,400.
Where did I get the $8,400? That is $4300 in interest that goes to the credit issuer plus $4,100 that your $100 monthly investment could have earned, if you had put your money in a mutual fund instead of sending it to the credit card company.
This is a cost of debt that your card companies won't share with you. They don't have to. It's not in their best interest to tell you that they are taking your retirement savings from you slowly and steadily every month.
Get out your latest credit card statement. See how much you paid in finance charges over the last month. If you have multiple cards, this could be scary.
This is money that you are not saving in an IRA, spending on groceries, buying shoes for your kids, giving to your favorite charity, or taking your family out for a movie on a Friday night.
You are your own best advocate. The tools of your defense? A pencil, a piece of paper, and a calculator.
If you have a card with a $5000 balance at 18% and make $100 payments each month, what do you think is the final tally to retire your balance and how long will it take to pay off?
Assuming you make no other charges after you begin to whittle away at the debt, it will take you 93 months, almost 8 years, for a grand total of $9300 paid out. That's an unbelievable $4300 in interest.
Now, if you were to invest $100 each month instead, in a mutual fund that grows at a modest 8% annually, in the same approximately 8 years, you would have $13,400.
To finance $5000, it will cost you $8,400.
Where did I get the $8,400? That is $4300 in interest that goes to the credit issuer plus $4,100 that your $100 monthly investment could have earned, if you had put your money in a mutual fund instead of sending it to the credit card company.
This is a cost of debt that your card companies won't share with you. They don't have to. It's not in their best interest to tell you that they are taking your retirement savings from you slowly and steadily every month.
Get out your latest credit card statement. See how much you paid in finance charges over the last month. If you have multiple cards, this could be scary.
This is money that you are not saving in an IRA, spending on groceries, buying shoes for your kids, giving to your favorite charity, or taking your family out for a movie on a Friday night.
You are your own best advocate. The tools of your defense? A pencil, a piece of paper, and a calculator.
Wednesday, April 23, 2008
Universal Default Provisions Raise Your Credit Card Interest
Have you ever heard of "universal default" and its effect on your credit cards' interest rates? It is a term whose meaning you need to understand if you use your plastic from time to time. You could be wearing a target on your wallet and never have any idea.
The particulars of universal default allow your credit card issuer to raise your annual interest rate, although you were never late on any payments on that particular card. This is a reprehensible practice, but one that is growing in implementation every day.
From time to time, your credit card company will check your payment history with your other account holders to see how diligent you are about meeting your obligations. If you have been late on your car, for example, the interest rate on your Visa might jump up to 29%. The credit issuers figure that if you are late with your other payments that you will eventually be in trouble with them too.
Funny how those guys work. When I was in school, if I made an F on a math test, I was not rewarded with an F on an English test too - on an English test that I had not even taken, no less.
One strike and your out. You don't even have to be up at bat.
My recommendation: always be on time, utilize online banking to handle your personal finances, and challenge everything on your card statements that you don't feel is fair. You would be surprised how much you can get done just by making a little noise.
The particulars of universal default allow your credit card issuer to raise your annual interest rate, although you were never late on any payments on that particular card. This is a reprehensible practice, but one that is growing in implementation every day.
From time to time, your credit card company will check your payment history with your other account holders to see how diligent you are about meeting your obligations. If you have been late on your car, for example, the interest rate on your Visa might jump up to 29%. The credit issuers figure that if you are late with your other payments that you will eventually be in trouble with them too.
Funny how those guys work. When I was in school, if I made an F on a math test, I was not rewarded with an F on an English test too - on an English test that I had not even taken, no less.
One strike and your out. You don't even have to be up at bat.
My recommendation: always be on time, utilize online banking to handle your personal finances, and challenge everything on your card statements that you don't feel is fair. You would be surprised how much you can get done just by making a little noise.
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