Possible land mines
Your sense of financial well being can be obliterated easily by any number
of land mines that lie in wait for the unsavvy user of credit. Here are a few
of them.
The cost of cash advances
Getting cash from your credit
card is one of the most expensive ways to put money in your pocket. There
is usually no grace period on cash
advances. That means you're charged interest the second the ATM spits out
the cash. And lenders often charge a higher interest
rate for this "convenience." So on top of the fee you'll pay to get a cash
advance - typically around 2% of the total - you'll pay a higher interest from
the day you get it. With all of this in mind, you might want to reserve cash advances
for true emergencies.
Short or non-existent grace periods
If you'll be paying your bill in full every month, you'll want a reasonable "grace
period" in which to pay the bill before interest charges start accruing. Look
at the disclosure information to see when interest is charged on new purchases,
and make sure you pay your bill on time. If your payment is one day late it will
almost certainly trigger interest charges. Also, if you carry a balance
over months, chances are you'll have no grace
period for new purchases.
When dealing with debt
consolidation and finance companies, consider that you may end up with one
monthly bill, but you might end up paying quite a bit of money for a long time
for that convenience. If you use a
home equity loan to consolidate, you are using your home as collateral.
Low minimum monthly payments
The minimum may only be two to three percent of the balance, a number that sounds
low enough to some people. However, the price of any given item will be relatively
steep over time and it may take years before you finally pay the bill in full.
Low APRs
If you'll be running a balance,
the interest
rate or APR (annual
percentage rate) will be an important consideration. Find a card with a low
APR, but do keep in mind that the lowest APRs (around 2.9%) are "teaser rates."
Teaser rates go up sharply as soon as the introductory period expires. Read the
fine print to see when the rate will go up and the maximum rate that can be charged.
If you're not prepared to pay your balance in full by the end of the teaser period,
don't fall for the pitch. Instead, find a regular card with the lowest rate for
which you qualify. Be sure to check with as many creditors
as possible and shop around for the best rates.
Are you considering an advance-fee loans? These are almost always a bad deal.
You pay a fee of hundreds of dollars for a company to guarantee you'll receive
a credit
card or personal loan. Legitimate creditors will not guarantee a loan and
will not ask for payment until the consumer has received the loan.
Unauthorized use of a credit card
A dishonest person can use a consumer's name, card number and expiration date
to order items over the phone, the Internet or through a catalogue. If a credit
card has been lost or stolen, notify the card issuer immediately. Pre-approved
card offers can be stolen from a mailbox without the knowledge of the intended
recipient and redirected elsewhere. If not shredded, information containing credit
card numbers and names can be taken from trash containers. In addition to fraudulent
charges, identity
theft - a much more severe problem - can result.
Credit report misinformation
Check your report at least once a year to make sure information is being reported
correctly. While inaccuracies that effect your creditworthiness are rare, it can
happen. Credit
bureaus like Experian
can help you make sure everything is correct.
Mistakes on a credit card bill
Study your monthly bill carefully and compare the charges against sales receipts.
If you have any doubts about a charge, call the credit card company and ask them
to provide more information. Make sure the APR listed on the statement is correct,
especially if you have a low APR as a promotional offer. Check to see if returned
purchases were correctly credited to your account.
Impulse buying
With the power of plastic, it's certainly tempting to indulge in purchases you
don't necessarily need. Such purchases can add up fast and generate a balance
that takes you by surprise. When you're contemplating an impulse purchase on credit,
take a second to think about the check you'll be writing to cover the cost a month
down the road.
This article is provided for general guidance and information. It is not intended
as, nor should it be construed to be, legal, financial or other professional
advice. Please consult with your attorney or financial advisor to discuss any
legal or financial issues involved with credit decisions.
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