Figuring out those darn finance charges
Have you ever looked at your credit card statement? Iím not talking about just making sure that all the transactions are correct. Iím talking about looking at the finance charges. I daresay that sometimes that figure is almost as great as the minimum monthly payment youíre making. After all, as long as you can keep the creditors at bay by paying the minimum, thatís all you care about, right? If you agreed, I urge you to reconsider.
Iím sure that by now, many of you realize that you lose money by buying on credit. Still, I donít think many of you appreciate just how much your credit cards are costing you. Iíd like to really drive that point home.
Letís say that Joe decides he needs new patio furniture. He doesnít have the $2,000 cash, so he slaps down his plastic card knowing that he can make the minimum monthly payment, no sweat. And so thatís what he does, month in, month, out, year in, year out, and pretty soon heís been doing this for one full decade. Surely itís paid off by now! No, not even close. In fact, if Joe continues to make the minimum monthly payment, he will be paying for that furniture for the next 38 years! And once he has made the final payment on his original $2,000 purchase, he will have paid an additional $5,300 in interest! Pretty disgusting, isnít it? And this is at 14% APR. Many cards run higher.
Some of you more savvy credit card users out there might be thinking that you already know this, so you donít fall for that trap anymore. You only get credit cards with a much lower interest rate, right? But do you notice that itís only for a few months? And do you pay attention to what the interest rate jumps to after that short introductory period? You kind of have to hunt around for this figure since they donít put it in plain view. Believe me, credit card companies are not losing money on these lower introductory rate offers.
Credit card promotions are becoming even more devious. Now the credit card companies are offering 0% interest on all balance transfers for up to 18 months! Wow, well, youíve GOT to take advantage of that, right? Iíll show you three reasons why you shouldnít.
First, even though you might be ďpre-approvedĒ, it is in no way certain that you will actually get this low rate. The credit card companies reserve the right to reconsider their original offer based on your qualifications. They will often go ahead and issue you a credit card, but it could be at a substantially higher rate. Donít assume that what you applied for is what you are getting.
Secondly, there are often balance transfer fees that are substantial enough to gobble up any savings you might make on a lower interest rate. Transfer rates run anywhere from 3% to a hefty 5%, with a single transaction costing as much as $65.
Thirdly, and this is the sneakiest part of all, in order to secure the 0% rate on your transfers, you are required to purchase a minimum amount on your card for several consecutive months. At first, this doesnít sound so bad. However, the fine print tells you that the interest rate applied to these new purchases is NOT the same 0% rate, but a different, much higher rate.
Whatís more, all your payments will always be allocated to the balance that will earn the credit card company the most money. This means that the balances with the lowest rates will be targeted first, while the balance with the much higher rate keeps accruing and compounding interest month after month. So, if you transfer a large sum in order to take advantage of this seemingly generous offer, you will likely be paying on it for a very long time before you ever get around to paying down the mandatory purchases, which are racking up some pretty serious charges in the meantime..
And weíve only looked at interest rates here. There are also default penalties, late charges, over-the-limit fees, transaction fees, ATM fees, stop-payment fees, cash advance fees and annual fees, all of which are on the increase. Over half the states in the union have no limit on what credit card issuers can charge for annual fees and yearly interest rates. These companies are gouging their customers with charges that are downright outrageous, and unfortunately for us, legal.
So how do you avoid falling into these sneaky traps that the credit card companies set? If you are lucky enough to not be playing the losing game of credit card roulette, for heavenís sake, donít start! If you are already involved, get out as fast as you can. Here are a few basic steps.
- Donít carry a credit card. Itís amazing how easy it is to ignore this obvious first step.
- Apply any extra money to your debts first. If youíre saving a little nest egg earning at a rate of 5%, but you have debts gnawing away to the tune of 12%, itís not difficult to see that this is a losing proposition.
- Target one debt for elimination at a time. Pick the one that can be wiped out the most quickly first.
- Take all the extra money from the first debt and apply it to your second target.
- Continue in like fashion until you have dug yourself out of this miserable pit.
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