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How Credit Cards Screw You –
On top of the crazy high rates, late fees, balance transfer fees, over the limit fees and cash advance fees
Interest-Free Period (Grace Period) – As long as you pay your balance in full every month then you will not be charged any interest on your purchases. Nice! BUT if you do carry a balance over to the next statement cycle (even if it is as little as $5) then there is no grace period on new purchases. That means you start getting charged interest from the date of the purchase. This is a big deal and makes using your card very expensive. This is exactly how your credit card bill snowballs into an unmanageable amount. Please take this one piece of advice. If you are carrying a balance on your credit card you need to stop using that card for additional purchases immediately. Stick it in your drawer until it is paid off. Use a different card if you must, but the right thing to do is stop using cards altogether.
Multiple Interest Rates – Let’s say you consolidate a bunch of debt and transfer the balance (for a 3% balance transfer fee) to your new credit card for a 0% promotion for 12 months. You start using your new card at the grocery store, on Amazon and wherever else you buy stuff. The interest rate on new purchases is 12.99%. Maybe you also decide to use one of those nice checks that came with the card in the initial package to pay your rent that month. The check is treated like a cash advance and has a 24.99% interest rate. So now you have 3 different amounts all being charged different interest rates.
When you go to make your easily manageable minimum payment at the end of the month the credit card company will most likely apply your entire payment to the 0% balance and charge you those very high-interest rates on the other two outstanding balances. In fact, if you only make the minimum payment you might pay off the entire amount of the initial 0% balance transfer before any payments get applied to the higher rate balances on purchases and cash advances. Credit card companies have different ways of handling this so make sure you check the policy with your specific card. You must stop using the card if you find yourself in this very bad situation. It can bury you.
Intro Promo Rates and Deferred Interest – You go to Best Buy to check out the newest computers and TV’s. You want a new computer, but you are just checking them out at this point. The associate comes over and explains how they have an awesome promotion right now where if you open a Best Buy credit card, spend at least $2,000, make the minimum payment each month and as long as you pay the entire balance before the end of the 18 month promo period, then you will pay no interest.
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To Being Great With Money,
Rich McCormack, CFP®
School of Personal Finance
