Caution: Those credit card offers just
keep coming. Seems there's hardly a day goes
by that your mail box is not stuffed with
some new bank offering some new credit card.
But there's a danger lurking for you also,
one you may already be painfully aware of.
Over use of credit cards is crippling the
spending power of millions of Americans. The
following is the truth about what really
goes on behind the scenes at your credit
card company.
Secret #1: Debt Addiction
Consumer debt is way out of control, but the
dope (I mean "debt") pushers just keep on
pushing. The average consumer has 7 credit
cards with an average balance per card of
$2500. (That's $17,500 in debt in case you
haven't done the math!) 60 million Americans
charge an average of $6,000 on credit cards
every year. Sure, there's safety in numbers,
but is this the company in which you want to
belong? I don't know about you, but I'd much
rather belong to the "below average"
customer group that has less than $1000 in
TOTAL credit card debt.
Credit card companies keep offering us
new cards every week (think of how many you
have gotten in the last year!) with higher
credit limits and cash advances. Basically,
they insult our intelligence. Many consumers
are flattered when they receive their
"PRE-APPROVED PLATINUM VISA, just fill out
the form below, sign and send back" letter.
We think we're being rewarded for a job well
done. The job, of course, being able to
spend money with the best of them and pay it
back better than most. Don't get SUCKED into
this mental trap!!! STOP TRYING TO KEEP UP
WITH THE JONES'. THEY'RE HEADED FOR
BANKRUPTCY ANYWAY!
Secret #2: The Never Ending Balance
If you make the minimum payment due on your
average balance of $2500 each month, your
credit card won't be paid off for over 30+
years! It's called "amortization," or in the
case of credit card repayment, I should say
"lack of amortization." In lay people's
terms, this simply means, you have no real
term set in order to pay this back. It's
open-ended, as in "NEVER ENDING!!"
They'll let you pay on that same balance
forever if you like. When you buy an
automobile, you may finance it for five
years. You know if you never send an extra
dime but your monthly payment to that loan
company or bank you will own that car on the
day of your 60th payment. But that's not the
case with credit cards. They are "revolving"
accounts. Kind of like the earth revolves
around the sun... I guess you can say they
are like the Energizer Bunny, "THEY KEEP
GOING, AND GOING, AND GOING, AND GOING, AND
GOING..."
Secret #3: The Transfer Trap
Because banks know that credit card usage is
at an all time high, most of them are
killing each other to get your business.
Many offer promotions like transferring
balances from other cards to the new card
they are offering you. If you transfer
balances from other cards, they say they
will charge you a reduced rate of interest
on those portions that are transfers. This
sounds like a great deal (going from 18% to
a promotional rate of say, 9.9%); however,
most of them have a catch. For instance, if
you do not charge something on the new card
each and every month, the interest goes up
to the regular rate of the card (which is
often high), or if you make one late
payment, you forego the lower promotional
rate, and the rate again goes up to the
regular rate of the card. Beware of the
"Transfer Trap." All you're really doing is
transferring your agony from one company to
another, and avoiding the real solution;
finding a workable plan that will get you
debt free once and for all.
Secret #4: Minimum Payment Misery
If you keep making your minimum payment
only, your balance will rarely ever get paid
off. Have you ever noticed how, while your
minimum payment due on your credit card is
$85, your balance only came down $6 dollars?
WHY??? That's because we pay un-Godly
amounts of interest on credit cards. Even
the so-called "low interest rate" credit
cards don't show their payments going toward
bringing down their balances. All they do is
just require a lower minimum payment. Sure,
this might help your monthly outgo right
now, but what's it doing to get you out of
debt faster? NOTHING! That's because the
MINIMUM PAYMENT DUE ON CREDIT CARDS ARE
BASICALLY "INTEREST-ONLY" PAYMENTS, and
making the minimum payment on a credit card
is a guaranteed way to NEVER PAY IT OFF!
Suppose you owe $2,000 on a card with 19%
interest and a 2% minimum payment. Paying
just the minimum every month, it will take
you 265 months--over 22 years--to pay off
the debt, and it will cost you nearly $4,800
in interest payments.
Doubling the amount paid each month to 4%
of the balance owed would allow you to
shorten the payment time to 88 months from
265 months--or 7 years as opposed to 22
years--and save you about $3,680.
Secret #5: Fine Print Fiasco
Example: Your rate of 6.9% is a teaser rate.
After six months, your rate will be 21%. The
Teaser, a.k.a. introductory rate credit card
has made credit card banks and centers
BILLIONS of dollars. Because so few
consumers ever read the FINE PRINT. You
know, the print that only the eyes of a
12-year-old can read without getting a
migraine? These credit cards come with
stipulations. There are too many "catches"
to name. But, I assure you, they are there.
Credit card banks don't make any money if
they are financing your debt at below Wall
Street Prime interest rates. So I leave you
with one last thought on this topic, "IF IT
SOUNDS TOO GOOD TO BE TRUE, IT PROBABLY IS."
Fight Back by Understanding These Terms:
The key to reading your credit card
statement is to understand the terms on it.
Here are explanations of common terms:
Amount due: Some cards use this term to
describe the minimum monthly payment. This
is not the total you owe on the card.
Annual percentage rate (APR): This is the
finance charge, expressed as an annual
figure, such as 21%.
Cash advance: A loan in the form of cash
(as opposed to purchases of goods or
services) made through a credit card.
Due date: The date by which your payment
must be received by the company, for you to
remain in good standing.
Finance charge: The interest charge on
your outstanding credit card balance.
Grace period: A period in which you can
make new purchases without paying interest.
(Not all cards have a grace period.)
Late fee: A charge assessed if your
payment is recorded after the due date.
Minimum monthly payment:
The smallest
amount you can pay to avoid being
delinquent. Paying the minimum is the most
expensive way to handle your credit card
bills.
Monthly periodic rate: A fraction of the
APR (1/12), the rate at which interest is
assessed during the billing period.
New Balance: The total owed after new
charges and credits have been added up.
Over-credit-limit fee: A charge assessed
if you put charges on your credit card that
exceed your approved credit limit.
Previous (or outstanding) balance: The
amount you owed last month, after that
month's payments and charges were added up.
Transaction fee: A charge for making a
purchase or receiving a cash advance.
Secret #6: The Cruel Cost of Cash
Advances
A cash advance is a loan billed to your
credit card. You can obtain a cash advance
with your credit card at a bank or an
automated teller machine (ATM) or by using
checks linked to your credit card account.
Most cards charge a special fee when a cash
advance is taken out. The fee is based on a
percentage of the amount borrowed, usually
about 2% or 3%. Some credit cards charge a
minimum cash advance fee, as high as $5. You
could get $20 in cash and be charged $5, a
fee equal to 25% of the amount you borrowed.
Most cards do not have a grace period on
cash advances. This means you pay interest
every day until you repay the cash advance,
even if you do not have an outstanding
balance from the previous statement. On some
cards, the interest rate on cash advances is
higher than the rate on purchases. Be sure
you check the details on the contract sent
to you by the card issuer.
Here is an example of charges that could be
imposed for a $200 cash advance that you pay
off when the bill arrives:
Cash Advance Fee = $4 (2% of $200)
Interest for one month =$3 (18% APR on
$200)
Total cost for one month = $7 ($4 + $3)
In comparison, a $200 purchase on a card
with a grace period could cost $0 if paid
off promptly in full.
THE BOTTOM LINE: It is usually much more
expensive to take out a cash advance than to
charge a purchase to your credit card. Use
cash advances only for real emergencies.
Secret #7: Hidden or Unexpected Fees
Most people look for a card that doesn't
have an annual fee, but did you know that
there are other fees that can cost you more
in the long run?
Late fees Most cards charge a fee when
payments arrive late, after the due date.
Some banks wait a few days before assessing
this fee, but many impose it the day after
the payment was due.
Some companies have a set fee, such as $10
or $15, while others charge a percentage,
such as 5%, of the minimum payment due. Just
paying late fees twice in one year can cost
you more than an annual fee.
To avoid late fees, mail your payment in
plenty of time to arrive before the due
date. If you pay your bill at the bank's
branch or ATM, find out how long it will
take to process your payment. Sometimes
payments made at a branch or ATM are not
credited for a few days.
Over-credit-limit fees Most cards assess a
fee if you charge more than your credit
limit. These fees are charged each time you
exceed your limit, so you could be hit with
several of them during one billing period.
Most banks have a set fee, such as $10 or
$15, while others charge a percentage, such
as 5%, of the amount you are over your
limit.
If you charge $400 over your limit, with a
5% penalty, you will pay a fee of $20. This
is in addition to interest charges.
Lost card replacement fees A few companies
charge people whose cards have been lost or
stolen more than once or twice. These fees
are usually $5 or $10. Pay Attention! Special fees can cost you
alot, so keep track of when you mail your
payments and how much credit you have left.
Secret #8: Sneaky Ways They Calculate
Interest
Most banks use an "average daily balance"
method to calculate interest. Average Daily
Balance Method.
1. Every day, the bank adds your charges and
payments to learn what you owed it that day.
It adds these totals and divides that figure
by the number of days in the month, to
determine your average daily balance.
2. Then the bank divides its annual interest
rate by 12 (the number of months in the
year) to get a "monthly periodic interest
rate." For example, an 18% interest rate
divided by 12 equals a monthly rate of 1.5%.
3. The bank multiplies your average daily
balance by the monthly periodic interest
rate, to obtain the finance charge for that
month.
In calculating your daily balance, most
banks include charges made during the month
("average daily balance, including new
purchases"). Others exclude those charges
until the next statement ("average daily
balance, excluding new purchases"), which is
to your benefit.
Secret #9: Two-Cycle Billing Method
Some banks retroactively eliminate the grace
period by using a "two-cycle billing
method." If you don't pay the entire
balance, the finance charge is based on the
sum of the average daily balances for both
the previous and current months. (Some banks
exclude new purchases from the finance
charge calculation of their two-cycle
billing method.)
You are only charged for a two-month time
period in the first month you don't pay all
charges. People who sometimes pay in full
and sometimes leave a balance will pay about
the same amount under the two-cycle method
as with a "no grace period" card.
Secret #10: Is the Interest Tax
deductible?
If the debt has been accumulated by business
expenses or to pay for business investments,
the interest paid to credit cards or the
mortgage may be tax deductible. Canada
Revenue Agency does not advertise this fact
as most people are in debt due to failed
business ventures or bad investments.
If you have more than 35% equity in your
home, it may be possible to consolidate and
restructure your debt to make the mortgage
tax deductible.
It varies case by case and it is best
that you review this will one of our agents
to determine of your debt applies to the
cause in the Tax Act.
THE BOTTOM LINE: You should know how your
bank calculates finance charges. Are you
ready to fight back and take charge of you
debts? Are you ready to get out of debt for
good? Great!
