Credit card debt is an area where it is important to know the rules and to do first things first. It is important to get out of this kind of debt first because it is usually the most costly. If you have ever taken the time to read the unique set of rules that govern a credit card, you know they can be complex and numerous. Of course the banks that provide credit cards know their own interest rules; they know their own averages, and they know their own risks. If you are going to borrow money from these banks, you had better know their rules as well.
Many of these institutions have begun to loosen their requirements and extend the length of credit card loans, causing consumers to go into further debt. Without understanding the gimmicks that can be used to get more money out of you, you’re probably losing far more than you think to a credit issuer.
For example, many credit card companies warn in fine print on the card contracts that they will bump up your interest rate by as much as 1.5 percent if they see a derogatory mark appear on your credit report. But what constitutes a derogatory mark? Credit card companies may consider any check done on your credit as “derogatory.” If you go to the bank seeking a loan for a new car, for instance, and had the bank run a routine credit check as part of the loan fulfillment process, later that check could be interpreted by your credit card company as a negative mark. The card company then feels legally justified in raising your interst rates. Unfortunately, because most people don’t bother to check their credit card statment each month, they have no idea whether their card company is raising interst rates.
Here are a few startling observations about credit card borrowing from an article in Consumer Reports entitled, “The New Rules of Borrowing.” It may help you see the value of knowing the rules.
Say you paid $19 for a pepperoni pizza by charging it to your card. If you carry no balance on your credit card and pay your bill within the 20- to 25-day grace period, the pizza won’t cost an extra dime. But consider instead the cost of that pizza if you are already carrying an unpaid balance of $5,000 on your credit card. If you simply add the cost of the pizza as a topping to all your other revolving debt, that “inexpensive” dinner out would have cost a total of $40.04. Did you really want to pay so much for a pizza? Probably not. Next time [when carrying balances] pay cash. And what bout perpetual payment? Lenders would prefer you didn’t worry how much a debt will cost or how long it will take you to repay. All they want you to think about is the minimum monthly payment that will keep your account current. At a recent meeting of the International Credit Association in Wilmington, Del., Peter McCorkell, senior vice president of Fair, Isaac, warned credit card industry executives of a proposed law that would require lends to disclose how long it takes to pay off a balance with minimum payments. “In some cases, the answer would be darn near infinity,” he announced to a ripple of giddy laughter. Paying off balances with the minimum now takes longer than ever because, over the years, credit card companies have downsized monthly minimum payments from between three and five percent of the balance to between 1.5 and two percent.
When making crucial financial decisions, such as which credit card to carry, it’s always wise to give yourself 24 hours or at least overnight to think about the decision and re-read anything related to the rules that will govern the contract once you enter into it. Never make on-the-spot decisions without first giving yourself time to thoroughly consider the issue and know the rules!