Credit Cards: The Untold Story

1. Credit Cards:The Untold Story Some people call a credit card a high-interest loan in disguise.

2. Credit cards and Debit cards are excellent methods of paying for purchases without having to carry cash around. • Credit cards are accepted in other countries; only take one, and guard it at all times. • Credit cards allow you to purchase items you may not have enough cash to pay for (boat, stereo system, dishwasher, remodel).

3. Debit Cards: • Debit cards are linked directly to a bank account and will not let you spend money unless there is money in the account to cover it. • One drawback to a debit card is also a weakness of direct deposit; once the seller has access to your bank account, they can change the charged amount and have legal rights to withdraw money.

4. When not to use a debit card: • On-line: identity theft could open a direct link to your bank account • Big-Ticket Items: using a credit card allows you to dispute charges or protect purchases with insurance • Restaurants, hotels, gas stations: businesses place ‘holds’ on transactions; freezing more money than you owe in case you run up the bill later • Monthly payments: automatic, instant payments can lead to problems; also if you cancel a service, the company can keep charging you

5. When to use a debit card: • Ordinary transactions: buying a cup of coffee every day is easier with a debit card • Larger amounts that don’t take checks: buying that computer desk just got easier (don’t let them take the card into the back room) • Reputable vendors: Safeway takes debit cards when you buy your groceries

6. Credit Cards: • Credit cards have some security behind them; if a purchase is made on a credit card, it can be cancelled by calling the bank. • Credit cards are also protected by the bank; if a bank suspects a credit card is being used fraudulently, it will disable it. (this can be awkward on vacations)

7. Massive credit card balances are a major economic problem for many Americans. • Americans are loaded with credit-card debt. • The average American household with at least one credit card has nearly $15,950 in credit-card debt (in 2012), according to CreditCards.com, and the average interest rate runs in the mid- to high teens at any given time. • This balance would take 6 years to pay off ($350/month @ 17% interest)

8. Real World Examples: • Suppose when you’re 18, you charge $1,500 worth of clothes and DVDs on a credit card with a 19 percent interest rate. • If you repay only the minimum amount each month, and your minimum is 4 percent of the outstanding balance (the lowest amount permitted by some issuers), you’ll start with a $60 payment. You’ll be more than 26 years old by the time you pay off the debt. That’s 106 payments, and you will have paid more than $889 extra in interest. And that’s if you charge nothing else on the card, and no other fees are imposed (for example, late charges). • If your minimum payment is based on 2.5 percent of the outstanding balance, you’ll start with a $37.50 payment. You’ll be over 35 years old when you pay off the debt. That’s 208 payments, and you will have paid more than $2,138 in interest, even if you charge nothing else on the account and have no other fees.

9. When to use a credit card: • When you can pay off the balance every month your credit rating goes up • Large purchases: if you can’t get money up front, but you can pay off an item soon • If you don’t want to carry cash

10. When not to use a credit card: • If you haven’t paid off the last balance, take it easy • Don’t use a credit card for items consumed quickly; meals, movie tickets, lattes, taxi rides, etc. unless you are an experienced credit card user; these small, easily used items can run your balance up very quickly, and the small amounts make it less noticeable

11. Credit Card Offers: • Cash-back rewards (check the fine print) • Much lower interest rates (12-13%) although these are usually only offered to higher balance users • Zero-charge transaction fees for certain transactions • No late fees, no annual fees, no foreign transaction fees