Make The Most Of Your Credit Card
Posted December 30th, 2009Credit cards are slowly becoming more and more affordable and manageable for customers nowadays, but it’s important you make the most of your card.
For at the current moment, and a good deal into the future as well, people are slowly adapting to the struggle of debt and are learning to rely on credit as the main source of seeing them through- because of this, interest rates on each and every credit card is being bumped higher and higher by the banks. What many don’t realise is that having a credit card with an obscenely high interest rate can be dangerous to your credit, especially if you do not have the means necessary to make your monthly payments on time.
As the article would suggest, intelligent methods to reduce (or possibly even remove) credit card fees are recommended. Also, you will learn about the common pitfalls that the average customer falls for. Be sure though that you do some personal research as well, so that you may compare fees, features, interest rates, and other qualities from your major bank choices, non-bank lenders, and credit unions.
No matter how much you owe, it’s always profitable to pay more than the monthly minimum, even if the amount is as low as five hundred dollars. As a base example of comparison, calculations will be used on an 18.25% interest rate credit card that also maintains an annual fee of $40. Usually, minimum monthly payments are of two options- 2% or $10, whichever is higher. If only this bare monthly minimum payment is made, without taking the annual fee into account, your debt will only grow. In fact, in fifty years, your total debt owed will be $664!
Instead of only paying the minimum amount allowed each month, it is practical to, at the very least, make payments each month taking the annual fee into account. As an example, a debt of $1000, using the same credit card as the above example, can be pad off entirely in twenty years’ time if you not only pay the monthly minimum, but also the annual fees on top of that.
Whatever you resort to- do not, under any circumstance, take every advertisement seriously if they are for refinancing opportunities or debt consolidation- least of all those programs that claim to take all of those problems away permanently. Despite the amount of money required, it is usually best to pay off those bills as fast as possible. Choosing to postpone those bills by adding them onto a twenty-five year mortgage is a bad idea, as the interest and annual fees will eventually cost you double the amount that would have sufficed for a one year credit card repayment plan.
Always do your research on cards that sometimes offer low “honeymoon rates“, as they also have a small trick up their sleeve. Once those low rates have been active for a time, they then revert to higher rates which are often above average compared to other cards that have a constant rate.
Making timely payments is not all that is required to save a lot of money. It also helps if you have the correct card, mainly those with lower interest rates. For example if you have a debt of $2500, and you choose to make the minimum monthly payment as well as an extra fifty dollars, you can save almost $300 with a more stringent card that has a lower interest rate (9.85% as opposed to, say, 16.25%).
Timely payments can only do so much though. The most effective way to rid yourself of any debt is to pay off as much as possible. Every cent and dollar can make a huge difference in the long run, especially with higher interest rates. For example, consider the possibility that you may one day owe one thousand dollars to the bank. You could go the expensive route (yet the route that most people take) and only pay the minimums and fees each month, which will cost you three thousand dollars in the long run. It will also take you 20 years before the entire debt is paid off. To save money and time though, simply add an extra fifty dollars a month- the amount will be paid off in as little as nineteen months, and your credit card will only cost you a little $1140!
Common Credit Techniques:
What many people are unsure about deals with consolidation- should they use a line of credit (added onto their mortgage) to eliminate credit card debt, or should they take out a personal loan? Depending on how strict you are on your payment schedule (and also how affordable a quick payment plan is for you), either option would be doable. The key to solving the issue is to plan it out carefully yourself; do not depend on outside programs that promise to solve every woe that you may encounter. Take a look at how much money you can spare, and then find a way to pay that money with a low interest rate. Five thousand dollars, for example, would only take $5552 to pay off over one year (with an %18.25 interest rate). Using a home equity loan over 25 years though (assuming the average eight and a half percent interest rate) would cost over $12,000! Paying more than double the original loan amount is not a very appealing idea. Keep in mind though that the home equity loan requires a much smaller monthly payment.
Another common technique employed by credit card agencies is called a “honeymoon rate“. These credit cards generally have a very low interest rate for a set amount of time, but it then skyrockets after that time period expires. Companies offering these cards often have an alternative card that has a better interest rate in the long-run. Switch to the latter option if they are available. If your credit card usually has some amount of debt on it, do not bother with honeymoon cards as the debt will usually build up quite rapidly. An alternative is simply looking for a card that has a constant interest rate, so the payments are more manageable and easier to budget.
Finally, many companies are starting to offer what they call “introductory rates”. These can vary greatly, but carefully reading the conditions of your chosen card can explain the way these work. In general, they work three different ways. First, they apply to all transactions, which also covers the initial credit balance for the first six months. Secondly, they cover the balance transferred with interest on new transactions (which are then calculated at a higher rate). Finally, they are offered for the life of the old balance. While this is generally a bad idea for a credit card that is used frequently (since the introductory rate is not applied to new purchases), it is a good idea for those cards that only have a single debt attached to them- only one charge means one rate to be applied interest, and the introductory rates for old balance lives are generally very low.
Saving:
While the time-honored tradition is simply to increase annual fees, a few other types of fees have been either increased or brought in to the picture altogether. A clever spender though can possibly evade these fees altogether! Some cards allow you to bypass annual fees if you spend enough money each year using those cards. The amount can range anywhere from $5000 to $20,000 though, so be sure to check your spending. These fees can also be waived for some time of introductory periods, and also if you have a mortgage with the credit card’s provider institution. Again, only some cards allow this. Another way to avoid fees is to simply assign a direct debit to your bank account. This will ensure that you do not forget a payment each month, which could save you around thirty dollars. Going over your allowed limit can also cost you in fees, so frequently check up on your budget through the phone or Internet.
Finally, avoid cash advances at all costs- they usually add on even more hefty fees. They accrue interest the moment they are made, and also have some type of charge attached to them (either a flat amount or a percentage advance). Electronic bill payments are also possible cash advances by some providers. The interest is the killer though; be sure to pay off all possible advances as soon as you are financially able.
Tips:
Keeping control of any credit card can be a difficult task, especially if you are not especially aware of the terms before you accept the agreement. These miscommunication issues can be the downfall of many customers, so ensure that you are familiarised and up-to-date with your credit card holder’s plans and policies.
Many companies have different interest rate policies. Ensure that the advertised interest rate applies not only to most transactions, but also to cash advances. Banks are very picky when it comes to matching up the interest rates to the proper types of charges. If you transfer your balance to a new card, ensure that everybody knows where your final payment will be processed. If you don’t, then you may end up accruing interest for both cards! Speaking of interest, make sure that you know when your credit card interest starts to count- these times can differ between purchase date, due date, or statement date. Failing to pay the full amount cancels the grace period in which interest isn’t applied. Generally, the least interest is paid when its accrued from the due date, and the most is charged when it is calculated from the purchase date.
Another pitfall many individuals fall into is quite common actually. Put simply, do not keep more than two credit cards. Not only does this help you manage annual fees, but it also allows you to more easily accrue any reward points that are offered. Even having two credit cards can be dangerous though as many people like to pay off one credit card with the other. This is a decent fallback plan, but still should only be used as a last resort to solve emergency situations.
Also be sure to avoid “incentives” that you may not be familiar with. Sometimes, having a less stringent program will make it more easily for you to overspend. On the contrary, loyalty benefits are generally a safe incentive program that can actually help the smart spender save money in the long run. By matching up your reward points with shops that you frequently purchase from, you can save many hundreds of dollars each year. These benefits are not unlimited however, and some of the older plans are slowly becoming less valuable as point caps have been introduced, fees have gone up, and older reward points are now worth less than then used to be.
Lastly, do not be afraid to seek help from licensed individuals that know what they are talking about. Generally free, financial counsellors are a great beginning step to take if your debt is getting out of control, or if your credit card commitments are getting way out of hand. They have gone through numerous programs so that they are adequately prepared to assist you in designing a personal budget, organising your finances, and even help you contact various officials that you would otherwise not be able to reach. Contacting these creditors is a lifesaver, and the counsellors will assist you in striking a deal to help you better pay off your bills.
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