Part II of the Credit Card Series: Start at the beginning if you missed a part.
Good news and bad news. Let’s start with the bad news (costs you money) before the good news (saves you money).
Nothing in life is free, but some credit cards offer no annual fee. This can translate to big savings. Credit card fees range from $39 to over $129 based on the features and perks of the card and the issuing bank’s policy. Before you choose a card, read the brochure about fees.
Some credit cards have an introductory fee or no fee for a period of time. Find out how much the fee will be when it reverts to the normal fee for that particular card. Your application for the card will have a footnote number or symbol on the advertisement stating “$0 Annual Fee”. The footnote is on the back of the application at the bottom and states the annual fee and when it begins.
Your credit issuer adds the fee to your bill as a purchase, which means it will draw interest if you do not pay the fee in the month it was charged or before the end of the grace period.
Purchases and cash advances draw interest. This is the penalty you pay for borrowing money. When you first get your credit card, there may be little or no interest charged on purchases. Again, look for the footnote explaining what the interest rate will be after the introductory period expires.
Typical interest rates on purchases range from 14% for premium cards to 22% APR on traditional cards. Average low limit cards carry between 16% and 26% APR for purchases. Cash advance interest rates are 4-10% higher than on purchases, meaning some cash advances carry interest as high as 40% APR.
Do fractions give you a headache? Let’s break that down.
Cash Advance of $1,000
Interest added paying minimum payment $1,990.34
Total paid back $2,990.34
This is assuming two things:
1. You do not miss a payment.
2. Your payment is never late.
It will take you seven (7) years to pay off $1,000, but you will have to pay $3,000 back. Cash advances on your credit card are not the best way to borrow money.
Credit card issuers charge consumers a variety of penalties for bad credit behavior. The list of offenses which incur fees include:
- Late Payments
- Over Limit Charges
- Violations of Terms of Service
The first offense is bad for your credit score. The penalties range from $29 to as high as $59.
When you charge something causing your credit card balance to be over its limit, your credit score gets a pass. You have essentially expanded your credit, but you have incurred a penalty between $39 and $62. Be aware, a late payment penalty can potentially put you over your credit limit, garnering you both fees.
Every credit card comes with a long contract listing the terms of service for you to use the card. If you violate the terms of service, your card can be cancelled by the credit card issuer. Violations of other terms are not considered severe enough to cancel your card, but do net you a penalty (which will be listed in your terms of service).
Save yourself money by reading the terms of service before you use the card.
Next, we look at credit card rewards.
(c) Ann Marie Dwyer 2011
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