If you’re like most doctors, your mailbox is probably filled with offer after offer for “pre-approved” credit cards, some with low introductory rates and other prerequisites. Many of these solicitations urge you to accept “before the offer expires.”
You may be prompted to look at your current credit card situation and wonder if now is a good time to take advantage of this new offer and get the card, or perhaps switch your existing card to one that offers different rewards. But before you decide to accept any credit card offer, it’s a good idea to look closely at the “fine print” – the credit card’s provisions. Too much debt may also affect your credit rating, so it’s advisable to examine your credit report to clear up inaccuracies or discrepancies. When is the last time you looked at your credit rating and your credit-card provisions?
Regardless of how many credit cards you may have, it’s good to periodically review the provisions of your credit card, why you own the card (e.g., conven-ience, to consolidate debt, to accumulate rewards, etc.) and how your card spending fits into your budget or overall financial goals.
According to MONEY magazine (July 13, 1999), Americans are loaded with credit card debt. More than 65% of all households in the United States have credit cards with an average balance of $2,811, while 91% of households earning $100,000 or more have credit cards with an average balance of $4,038. What’s more, the average interest rate on these purchases is about 18%, with some interest rates as high as 23%.
If you are like many, you may find that credit cards are necessary to help get you over some rough spots a few times a year. If that’s the case, and you pay off the cards as soon as possible, you’re probably fine. But if you depend on credit cards as part of your normal financial routine, and use them to survive, you may be digging yourself a deep financial hole – a hole that may be getting deeper with every credit card transaction you make.
Developing a Plan
If you’re starting to think you might be overextended, it’s important to develop a financial plan that addresses credit-card spending. The plan can be as simple as setting up a timeline of when you will stop borrowing, when you are going to pay off the credit, and how much money you are going to save each month once the credit-card debt is paid off. You can start by putting away the same amount of money you were paying on your credit cards. The key is to limit debt to the things you really need or for things that increase in value (e.g., home, collectibles, etc.), not for things you can consume quickly, such as clothes, meals and vacations.
Statistics indicate that consumer credit-card spending continues to increase. American Express revealed in its “Everyday Spending Index” (released in 1998), that 33% of consumers surveyed report using credit cards more frequently today than five years ago. 68% of those surveyed said the most popular reason they used credit cards was to pay for day-to-day expenses. Over one-half of those surveyed said their typical credit card purchase is $100 or less, with 45% charging purchases under $20.
The fastest way to accumulate unmanageable debt is to live a lifestyle that forces you to rely on credit cards to pay for short-term purchases. That’s why it’s important to determine the types of purchases you will be making with the credit card and budget accordingly before applying for a new credit card or switching to another card.
Adding to the mix, banks and credit card issuers are involved in an intense competition for customers. In short, they are enticing people to use their credit products, especially credit cards, to pay for items that may not need to be paid for with credit.
With all that said, it’s obvious that it’s often more convenient to carry around a credit card than pockets full of cash. In today’s changing economic climate, it is nearly impossible not to carry some type of credit card to make travel reservations, purchase items through toll-free numbers or the Internet, or while traveling domestically and overseas.
So if you are going to live in a credit-card world, beware of creditors bearing gifts. Scrutinize the terms and conditions of the credit card you are applying for or use now. It requires a bit of homework – especially to uncover the fine print in many credit- card agreements.
Smart consumers usually comparison-shop when looking for credit such as a mortgage or an auto loan. It’s also a good practice to look around when shopping for a credit card, because the choices you make could save you a significant amount of money in the long-term.
Review the Disclosure Form
Start your research by looking at your current credit-card plans. Compare the cards you already have with offers you receive in the mail for terms that may better suit your spending and repayment habits. The costs and terms of the plan or plans can make a difference in how much you pay to borrow.
In the disclosure form, the key credit terms to consider are the:
- annual percentage rate (APR)
- annual fees
- grace period (also known as the “free ride” period)
- transaction fees and other charges.
Annual Percentage Rate (APR)
The APR is a measure of the cost of credit, expressed as a yearly rate. It also must be disclosed before you become obligated on the account and on your account statements. The card issuer also must disclose the “periodic rate” – the rate applied to your outstanding balance to calculate the finance charge for each billing period.
Some credit-card plans allow the issuer to change your APR when interest rates (i.e., the prime rate) change. Because the rate change is dependent on fluctuations in the prime rate, these plans are called “variable rate” programs. Rate changes raise or lower the finance charge on your account.
If you’re considering a variable rate card, the issuer must also provide information that discloses:
- that the rate may change
- how the rate is determined: which index is used and what additional amount (the “margin”) is added to determine your new rate
At the least, you should receive information before you enroll in the account regarding limitations on the degree and frequency the rate may change.
Some issuers offer rewards for using their cards, or other benefits, and charge annual membership or participation fees. Annual fees can range from $25 to $50, and sometimes up to $100. Fees for “gold” or “platinum” cards can vary from $75 up to several hundred dollars. Frequently offered benefits include airline miles, and rental car and hotel vouchers. Therefore, if your goal is to save money, and you aren’t interested in these incentives, it would be in your best interest to look for a credit card that has no or a low annual fee. But if you want to earn rewards, then perhaps a card with an annual fee is right for you. In short, the decision should be based on your needs and values.
Also called a “free ride” period, a grace period lets you avoid finance charges by paying your balance in full before the due date. Knowing whether a card gives you a grace period is important if you plan to pay your account in full each month. Without a free ride period, the card issuer may impose a finance charge from the date you use your card or from the date each transaction is posted to your account. If your card includes a grace period, the issuer must mail your bill at least 14 days before the due date so you’ll have enough time to pay and not incur a finance charge. Generally, there is no free ride period for cash advances or balance transfers.
Transaction Fees, Other Charges
Your current credit card may include other costs. Some issuers charge a fee if you use the card to get a cash advance, make a late payment, or exceed your credit limit. Some charge a monthly fee regardless of whether you use the card. Take these items into consideration – along with how you pay your bills each month, whether in full or only partially.
Calculation of the Finance Charge
As you compare your current credit card against others, it is also helpful to know how the credit card issuer calculates the finance charge on your credit card bill. To determine the finance charge, an issuer will apply a periodic rate to a balance.
Card issuers use different balance calculation methods such as the:
- average daily balance method
- previous balance method
- adjusted balance method
- two-cycle balances
With the average daily balance method (the most common method), the issuer calculates the balance by taking the amount of debt you had in your account each day during the period covered by the billing statement and averages it. With the previous balance method, the issuer uses the balance outstanding at the end of the previous
period – that is, the period prior to the one covered by the billing statement. With the adjusted balance method, the balance is derived by subtracting the payments you’ve made from the previous balance. With the two-cycle balance method, the issuer calculates your balance based on your last two months’ account activity.
If you don’t understand how your balance is calculated, ask your card issuer. An explanation must also appear on your billing statement. In the end, your goal is to find the best deal for your budget and repayment style. For example, if you always pay your monthly bill(s) in full, the best type of card is one that has a low annual fee, offers a grace period for paying your bill without paying a finance charge, and also offers you a rewards program as one of the benefits.
You’ll also want to consider whether your present credit limit is high enough, how widely your card is accepted, and the plan’s services and features. For example, you may be interested in “affinity cards” – all-purpose credit cards sponsored by professional organizations, college alumni associations and some members of the travel industry. An affinity card issuer often donates a portion of the annual fees or other income to the sponsoring organization.
Special Delinquency Rates
Some cards with low rates for on-time payments apply a very high APR (sometimes exceeding 20%) if you are late a certain number of times in any specified time period. The time period could be as extreme as a specific hour, day, etc. In some instances, you may be penalized if your mailed payment arrives late to the credit card issuer’s office because of delivery delays. Information about delinquency rates should be disclosed to you, by the issuer, in
credit-card applications or in solicitations that do not require an application. In short, it’s extremely important to read the fine print thoroughly before entering into the credit-card agreement.
A word of caution: If you only make the minimum payment required each month, while continuing to add to your balance, you may be getting yourself into deep financial trouble. Worse yet, if you use one credit card to pay the balance on another credit card, you are only throwing the anchor onto your sinking financial ship.
Credit card issuers may automatically add enhancements or other features in the plan without charging extra fees. Enhancements can include reward programs that offer you cash rebates, purchase protections, warranty guarantees, travel accident or automobile rental insurance or discounts on goods and services purchased.
Because there are so many options, it’s important to pick the card that gives you enhancements that you will actually use. However, before signing up, be sure – once again – to read the fine print. Many credit card companies limit the enhancement levels. For example, a credit card with a rewards program may limit the amount of rewards you can earn with their card. What this means is that after you have reached the designated spending limit with the credit card, you can no longer continue to accumulate rewards; once you reach that limit, you may want to switch your purchase activity to another card.
Credit Card Registry Programs
At the same time you are reviewing the credit-card agreement, you should review what provisions are in the agreement that cover you if the card is lost or stolen.
Because many people carry around several credit cards at one time, it’s in your best interest to look into credit-card registry programs. These programs are available for a small fee and allow you, with one telephone call, to cancel your credit cards if they are lost or stolen.
Under federal law, the maximum amount you can be held liable for, for charges you didn’t authorize, is $50 per credit card. In some cases, a card issuer may waive the $50 liability, if the lost or stolen card is reported immediately. Unfortunately, many consumers are not aware of the protection built into their credit cards.
Even with this liability limit, if you carry 10 to 15 credit cards with you at one time, you may be liable for $500 to $1,000 if the cards are used by someone after they are lost or stolen. An option is carry one or two credit cards with you at one time – or better yet, cancel cards you don’t use, because owning a lot of credit cards can negatively impact how credit grantors view your credit bureau report.
You may also want to keep a photocopy of your credit cards, as well as a photocopy of your driver’s license, along with the appropriate numbers to call in case your cards are lost or stolen.
After taking all this information into consideration, if you decide to apply for another credit card because your present credit card is not the one for you, you will most likely be asked to complete a new application. Before issuing you the card, the issuer will request a credit report from a consumer credit reporting agency.
Your credit report usually includes personal information, employment information, a list of creditors, payment history, any bankruptcies or lawsuits, and any inquiries made about your credit history. You should get a copy of your credit report from each of the three major credit reporting agencies – Equifax, Experian and Trans Union (see the info box on page 64 for contact information) – once a year to ensure the information is accurate. Each agency charges a service fee.
To get a copy of your credit report, you must provide the following in writing:
- full name, including your maiden name if applicable
- current address
- previous address (if needed for a five-year credit history)
- Social Security number
- date of birth
If you have been denied credit because of negative information in your credit report, you may ask which agency provided your credit history and then obtain a copy of your report within 60 days from that agency at no charge. In addition, you are entitled to one free report if: you are unemployed and plan to seek employment within 60 days; you are on welfare; or your report is inaccurate because of fraud.
Each credit agency uses a different report format. When you request a copy of your report, the agency should include a legend to help you interpret it.
If you find negative information in your credit report that is correct, you can:
- Pay any balances so creditors can update your file.
- Wait the required length of time for negative information to be taken off. Credit agencies must automatically delete negative information that is more than seven years old, with the exception of bankruptcies, which remain for 10 years.
- Write a brief statement to be included in future reports. While the law limits this information to disputes, most credit agencies will include explanations, such as unemployment.
Accurate information cannot be removed from your credit report. If you have questions, contact the U.S. Federal Trade Commission at 202-326-2222, or visit the agency’s website at www.ftc.gov.
Incorrect information in your credit report can be corrected by:
- Requesting, in writing, an investigation that, by law, will be made within 30 days.
- Contacting the creditor, in writing; if you are not able to resolve the dispute, the creditor must report it to the credit-reporting agency.
- Including a brief written statement explaining your side of the dispute in the report.
If any deletion or notation is made regarding the information, you may request that the new information be sent to any employer who has received a credit report during the past two years, and, in addition, anyone else who has requested credit information in the previous six months.
A Word of Caution
Remember, each time you apply for a credit card, this information gets added to your credit report. Some creditors, when reviewing your credit report, may view too many applications negatively and therefore may not issue their card even though you may have sound financial credit.
Just as you would normally conduct a yearly business review, it is also a good idea to do the same with your credit cards. Now is as good a time as any to look closely at the provisions in your credit card and examine your credit rating report. You will not only become a better-informed consumer – it’s likely you’ll save money, too.