If you already have credit cards, looking to get a credit card, trying to pay down the balance on your cards or using your cards to stay afloat month to month you must read this post!

According to the Federal Reserve Statistical Release of May 2008, outstanding consumer debt reached $961 billion for revolving (credit card) accounts! Which translates to the average American carrying a credit card balance of $8,000.

It seems in our society we must have credit cards to survive! I don’t advocate using credit cards, cash is absolutely the way to go. However, if you do have/need them let’s at least be smart about the kinds of cards we do have.

First of all, credit card debt is considered unsecured debt. There is no asset the bank can take away from you should you default (not pay) your balance. Since credit card lenders don’t have any collateral, and only your credit score to gauge your financial worthiness, interest rates are often higher than loans with secured debt, such as a home or car.

INTEREST RATES:

The interest rate you are charged is directly based on credit score. The better the score, the lower the rate. The worse the score, the higher the rate. Ideally, your rate should be around 10%. If it’s higher, you are paying too much and need to take the following steps:

  1. Call the card issuer and simply ask for a lower rate, if they so no, call back and speak to someone else.
  2. Look into doing a balance transfer to a lower rate card. Be mindful of transfer fees, try to find a card without a fee for transferring a balance as your current card will most likely charge you 3% for leaving.
  3. Try a card with a low APR introductory period. At least you can save some money for six to twelve months and get out of debt faster.
  4. If your original card issuer wouldn’t lower your rate in step one, after you’ve transferred your balance call them back and tell them if they want to keep your business and the remainder of your balance they’ll need to lower the rate.
  5. Do NOT open more than one new card in a six month period. Applying for new credit in a short amount of time will hurt your credit score and you need this as high as possible to keep qualifying for better rates.
  6. On the new card with the balance transfer or introductory period do NOT put new purchases on this card. Only the transferred amount is entitled to the low rate. New purchases with charged a much higher ‘regular’ rate.

GRACE PERIOD:

Your grace period is the length of time between your statement end date and the due date. You are not charged interest during the time it takes them to print and mail your statements to you provided your balances are paid in full each month and prior to the due date. Even if you make your minimum payments on time you will still be charged interest. The grace period only works when balances are paid off in full.

  • Find a credit card with the longest possible grace period, 20-25 days.

BILLING CYCLE:

There are two methods card issuers use when computing your statement: average daily balance or two-cycle average daily balance. You’ll find this distinction in your fine print.

When you carry a balance, the two-cycle method will hurt you worse. For carrying the same amount as you would on a card computed using the average daily balance you’ll end up paying a higher interest charge. The two-cycle method charges interest based on the balance of your previous billing cycle along with the current billing cycle. If the previous month you had a high balance and paid the majority of it off and only charged a small amount the subsequent month, the amount you will be charged interest is based on a calculation that includes both the large (previous) and small (current) balance. If you find your card charges this way you should transfer the entire balance immediately if possible.

Average daily balance billing is only computed based on the current billing cycle balance. Using the same example above, with this method you’ll only be charged interest on your current (small) balance instead of a combination of two months balances.

MINIMUM AMOUNT DUE:

Your minimum amount due each month is a calculation based your balance amount. Usually this runs 1.5% to 3%. The higher your minimum amount due the better off you’ll be in the long run. Don’t think a few percentage points is a big deal? Let’s take a look at an example:

Let’s say you have a credit card balance of $20,000 at 18% interest. Your minimum payment is based on a calculation of 2% of your outstanding balance. Here the minimum payment would be $400 a month. If you never paid more than the minimum and didn’t charge any additional purchases it would take you 69 years to pay it off and $60,000 would have gone straight to interest.

With the same example, $20k @ 18% with minimum balance due at 3% your payment would be $600. Paying $600 a month will take 26 years to pay off with ‘only’ $20,000 going towards interest.

Let’s say however, you stay diligent and even though the minimum payment due will go down each month as your outstanding balance goes down, you continue to pay the original minimum amount due of $600, it will only take you 4 years to pay off the balance!

That one percentage point will save you tens of thousands of dollars.

You’ll also want to start out with the lowest regular rate card you qualify for, regardless of any bonuses/benefits. Here’s a sample of how long it would take you to pay off a balance of $5,000 at different interest rates;

$5,000 @ 21%, with a minimum payment of $125 will take 33 years and 9 months

$5,000 @ 9% with a minimum payment of $125 will take 15 years and 11 months

DUE DATE:

The due date is the date the creditor must have payment in their hands. The due date is NOT the post-marked date. They don’t care when you put the payment in the mail, they want the money in their account on or before the due date. Do yourself a favor and always plan to have your payment arrive 5 days in advance.

ANNUAL FEES:

Bonus cards, i.e. frequent flyer programs, cash back, discounts, etc. are only acceptable on a card with a low iterest rate, long grace period and average daily balance. If you have to pay an annual fee of $50 to $75 to receive the benefits the card is not worth it. There are plenty of cards out there with competitive bonus offers that don’t require an annual fee.

CASH ADVANCES:

The day you pull out a cash advance on your card you will begin paying high interest on it. I mean 20% or above. There is no grace period. Add to that, if your card already carried a balance at a lower rate before the advance, any of your payments will be applied to the lowest interest rate balance first. You can’t even put a dent in that cash advance amount until the entire previous balance is paid off. Plus there is also a withdrawal fee which can be 2% to 4% of the amount.

BEWARE:

Your new low introductory or balance transfer rate is very sensitive. Should you make even one late payment you can forfeit your lower rate. If you have multiple cards or loans you must make the minimum payment on time. If you’re late on any card, even if it’s not the same card issuer, they will still raise your rates. They check your credit report periodically and if you’ve been late with any of your other debts, the creditors start to worry you won’t make good on your debt with them and will try to get as much money out of you upfront as possible.

Remember, only use cards with low interest rates, long grace periods, the average daily billing cycle, and a 3% minimum amount due. Always pay at least the minimum on time on all your debts. Never pay an annual fee or take out a cash advance!!

To find good cards and compare rates check out these sites: www.cardweb.com www.bankrate.com

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