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| If
you're running short of cash, a credit
card can help you in a pinch by allowing you to buy
now and pay later.
But this "see-it-spend-it-pay-for-it-later"
mentality has
conceded to Americans owing a lot of money. In fact,
in 1996, we owed
$460 billion in consumer credit card debt. Perhaps if consumers understood what the flyspeck fine print of the terms on the back of a credit card bill meant, their credit card behavior might be curbed. In order to get a grip on your credit card habits, take a peek as to the different terms involved in securing a line of credit. Most credit cards operate as revolving credit, which means that you're provided a line of borrowing that you can tap into at will and pay back as quickly or slowly as you want---as long as you pay the minimum required each month. Sometimes if you pay your balance in full each month, the lender may increase your credit line, giving you more borrowing power. Note: This is not a license to shop! When you are shopping for a credit card, compare the following terms from each issuer: Annual Fees: Annual fees can range anywhere from $15 per year to as much as $300 per year for a platinum American Express card. Banks defend these fees by the services they offer, such as discount travel, 24-hour service, rebates and more. Typically, the higher the annual fee, the larger the credit line. Tip: If you're the type of person who pays off your balance in full each month, choose a card with no annual fee. Annual Percentage Rate (APR): A finance charge may be as high as 21 percent or as low as 5.9 percent, but when the rate is stated as an APR, you can easily compare one loan to another. An APR means that the loan's interest cost must be stateed as an annual percentage. Some lenders charged a fixed APR, while others levy a charge that rises and falls based on an index, such as the prime rate. Finance Charges: This is an important term to understand when comparing credit card offers because credit issuers use random measures. The most common type of finance charge is the average daily balance level, in which each month's daily balances are added together, then divided by the number of days in the month. Some issuers include new purchases in their calculations; others do not. Still, others calculate the average daily balance for two billing cycles---the current and the previous---while some calculate the balance based on the current period only. Tip: Get a credit card that calculates charges based on the most recent cycle and that excludes new purchases. Some issuers use the previous balance method, where they base their finance charges on the amount owed at the end of the previous billing cycle. The adjusted balance method is used by other issuers, where they subtract all payments made during the month, then add the finance charges. Tip: The only way to avoid all these charges? Pay off your balance in full each month. Grace Period: The grace period is the amount of time a lender allows before charging you interest on the balance due. Standard is 25 days from the date of the bill before they assess finance charges. If there is no grace period, finance charges will accrue the moment you make a purchase with your credit card---even though you haven't received a bill. Tip: Choose a credit card with a higher grace period so you can stretch your payments out over several weeks. Record when your bank usually sends out its bills and charge items on an account immediately after the bill goes out. If your bill is sent out on the 10th of each month and you make a purchase on the 11th, that item will appear on next month's bill---allowing you almost a two-month grace period. Late Fees: Many issuers charge you an over the limit fee to penalize you for exceeding your line of allowable credit. Also, if you are late with your bill, you will be charged a fee, typically up to $20. Minimum Payment: Some issuers will set a high minimum if they are uncertain of your ability to pay, however, most issuers require you to pay a minimum payment of 2 percent of the outstanding balance. Thinking about an Auto Loan? Home Equity? Any bank product? We give you unbiased rates for your area at bankrate.com. |