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The Dirty Dozen Credit Card Facts

April 11, 2013

Have you checked your mailbox yet today? How many credit card offers do you think you received?

Each credit card offer is a new opportunity to get farther into debt, hand over HUGE interest payments, and never get any closer to financial security.

Instead of being flattered every time you’re offered a PRE-APPROVED PLATINUM credit card, it’s time you learned the truth behind credit card offers. Here are the DIRTY DOZEN facts that can help you avoid losing your shirt from credit card interest!

FATAL FACT ONE: Credit Card Debt is out of control!

Canadians spent over $230 billion on credit cards in 2008. In 2010, there were 71.3 million credit cards in circulation in the country. Tragically, one third of Canadian credit card cardholders don’t pay off their balances regularly, which means they’re paying exorbitant interest on billions of dollars of credit card debt!

No wonder the credit card offers keep piling up in our mailboxes. Credit card companies have been very successful in ADDICTING us to debt. And just like other pushers, they make a fortune from our hardship.

The next time you’re flattered by receiving a PRE-APPROVED PLATINUM credit card, stop and think who’s benefiting when you use it. Do you really need another way to spend money you haven’t yet earned? Do you really need to work harder just so you can line the pockets of already rich companies?

NO!!! The next time you’re offered a new credit card, just say NO. Say NO to back-breaking debt. Say NO to eventual bankruptcy. And say YES to a brighter financial future!

FATAL FACT TWO: Fine print is small because they don’t want you to read it.

Sure, the advertised 7.4% rate on a new credit card sounds great. But buried somewhere in the fine print is the fact that this is only an introductory rate. Six months later the interest rate automatically jumps up to 19%. Oops, you missed that, right?

It’s called “fine” print because it makes credit card companies feel “fine”, and it’s like paying a “fine” for not reading the details. But who can blame you? Not only is it too small to read, it’s written in a foreign language called “legalese” (see FATAL FACT EIGHT).

If a credit card offer sounds too good to be true, get out your magnifying glass and you’ll usually find the painful truth in the fine print. Don’t sign anything without reading it first!

FATAL FACT THREE: The loan with the term that stretches into infinity.

Let’s face it, a credit card is simply a loan. But unlike a car loan that may have a five year term, a credit card has NO term. With a car loan, if you make your monthly payments, you know you’ll own the car in five years. But you can make the minimum monthly payment on your credit card for the rest of your life and still not have everything paid off!

Let’s say your average monthly balance is $2,500 and you make minimum payments.

At that rate, your card won’t be paid off for at least 30 years! And many people keep much higher credit card balances than that.

Credit cards are open-ended or revolving loans with obscene interest rates. And what’s worse, they encourage you to make minimum payments that are so low, they barely cover the interest charges (see FATAL FACT SEVEN). That’s why paying off your balance can literally take forever!

FATAL FACT FOUR: Hey, where did my low interest rate go?

Even if you have on-time payments every month and a spotless credit record, your interest rate could still rise unexpectedly. Buried deep in most credit card contracts is wording to the effect that your interest rate can be changed at any time for any reason with 15 days’ notice. Let’s say you make a purchase thinking you have a nice 7% rate, then before your payment even becomes due the card company raises your rate to a fat 10%! Highway robbery? Yes, but there’s nothing you can do about it because it’s covered in the contract.

FATAL FACT FIVE: There’s a catch to trading up.

With so much money to be made, there are dozens of credit card companies out there, and they’re all after YOUR business. When’s the last time you were offered a sweet interest rate if you transferred your balance to a new credit card? It happens every day and most people fall for it because there’s nothing to lose, right?

WRONG! Let’s say the new credit card offers you a rate that’s half what you’re paying now. Sounds great, but there’s a catch. In fact lots of them. For starters, the new rate only applies on the portion of your balance that was transferred. Plus, if you don’t charge something on the new credit card every month, the rate goes up to its much higher regular rate. PLUS, if you make one late payment, the lower promotional rate no longer applies and you again pay the higher regular rate.

In the end, the new credit card company is the only one who benefits when you transfer. All you’re doing is building more and more debt as you move it around—instead of adopting a strategy to become debt-free once and for all.

FATAL FACT SIX: The most expensive transaction of all.

Taking out a cash advance is basically the same thing as taking out a loan, except instead of paying ordinary loan interest rates, you pay sky high credit card rates AND a long list of added fees. Whether you get a cash advance on your card from your bank, from a cash machine or by writing a cheque on your credit card, you end up paying through the nose.

Most cards charge a cash advance fee of about 2-3% of the amount borrowed. Some cards have a minimum fee of $5, which on a $20 cash advance amounts to 25% of the amount borrowed!

While you often get a grace period on purchases, most credit cards don’t give grace periods on cash advances. Even if you don’t have an outstanding balance, you pay interest every day until you repay the advance. And to make matters even worse, some cards charge higher rates of interest on cash advances!

Let’s say you take out a $300 cash advance and pay it off when your bill arrives. Depending on the card, here’s what you might typically pay:

One month’s interest: $4.50 (based on 18% APR)
Cash advance fee: $6.00 (based on 2% fee)

Total cost: $10.50

If this had been a $300 purchase on a card with a grace period, you would have paid NOTHING. Remember, cash advances are the MOST EXPENSIVE way to use a credit card and should only be used in emergencies!

FATAL FACT SEVEN: It’s called “minimum” payment for a reason.

Minimum payments are deliberately set so low, they’re virtually the same as “interest only” payments. That’s why it takes forever to pay off your balance, because all you’re doing is servicing the interest payments.

On top of that, the interest rates you pay are ridiculously high. Ever notice that when you make a minimum payment of say $85, your balance only comes down by something like $6? Virtually ALL your payment goes to interest. Even with bare-bones low-rate credit cards, your balance doesn’t diminish much because they lower their minimum payment along with their interest rates.

Let’s face it, making smaller payments isn’t going to get you out of debt faster. What you need is a financial strategy that will free up enough cash to make bigger payments so you can get out of debt once and for all.

Let’s say you owe $2,000 on a card with 19% interest and a 2% minimum payment. By making minimum payments, it’ll take you over 22 years to pay off the debt and cost you nearly $4,800 in interest. But if you made 4% payments instead, you’d pay off the debt in only 7 years and save about $3,700!

FATAL FACT EIGHT: A language only spoken by lawyers.

Painful as it is, you absolutely have to read the fine print on credit card offers. Here’s your handy-dandy translation guide so you can understand what all those terms REALLY mean:

• Annual percentage rate (APR): Make sure the rates you see quoted are APR. Some cards express the rate as a monthly figure to make it sound more attractive.

• Monthly periodic rate: This is the rate at which interest is assessed during the billing period. Equal to one twelfth of the APR.

• Amount due: Instead of quoting the total amount you owe here, some cards quote the minimum monthly payment, which will keep you in debt forever.

• New balance: This is the total amount you owe after new charges and credits have been taken into account.

• Due date: The date the company has to receive your payment by, or you go into arrears.

• Late fee: The charge you pay if your payment is recorded after the due date.

• Finance charge: The interest charge on your outstanding balance.

• Grace period: Some cards give you a few days in which you can make new purchases without paying interest.

• Minimum monthly payment: The smallest amount you can pay without becoming delinquent. Also known as the most expensive way to manage your credit cards!

• Over-credit-limit fee: On top of interest charges, you’ll pay an additional fee if you charge more than your approved credit limit.

• Previous (or outstanding) balance: What you owed last month, after that month’s payments and charges were taken into account.

• Transaction fee: The fee you’re charged for purchase or cash advance transactions.

• Cash advance: Borrowing money on your credit card.

FATAL FACT NINE: A fee for every occasion.

When you’re shopping for a credit card, maybe you’re just considering the interest rate and annual fee. But if you check the fine print, you may find a list of EXTRA FEES that can make your low-rate, no-annual-fee card much more expensive. Here are just some of the common fees that cards charge:

• Fees for being over your credit limit. Not only do most cards charge a fee when you go over your credit limit, they charge this fee EVERY time you exceed the limit, so you can pay it several times during a single billing period. In most cases, it’s a flat fee of $10 or $15, but in some cases it’s a percentage. So if you go $500 over your limit and the fee is 5%, you pay $25 IN ADDITION to regular interest charges.

• Fees for being late with a payment. If your payment arrives after the due date, some cards charge a fee the very next day. The key word here is “arrives”—it doesn’t matter when you mailed it or made the payment at your bank or teller machine. If the post office is slow or if your bank takes a couple of days to process your payment, you’ll still be charged for being late by the credit card company because your payment didn’t ARRIVE on time. Again, this fee can be a flat fee of $10 or $15. But often it’s a percentage of the minimum payment due, and can be as high as 5%. Either way, if you pay late fees twice in a year, you’ll likely be forking out MORE than you would have paid for an annual fee!

• Fees for having a lost card replaced. If your card has been lost or stolen more than once or twice, some card companies charge a fee of $5-10.

FATAL FACT TEN: Surprise! We just increased your interest rate!

Again, it pays to check the fine print on your credit card contract. Some cards will automatically raise your interest rate if you’re late with a payment or have too much outstanding debt on ANY of your credit cards or loans. Even though credit card companies seem to be willing to give cards to almost anybody, they’re actually very careful about the risks they take. They monitor your credit record, and if they see you’ve missed a payment to anyone (phone bill, utilities, car payment, etc.) of if they judge that you’re amassing too much debt, they can raise your interest rate to help cover the increased risk. Just when you might need a break, you end up paying even more!

FATAL FACT ELEVEN: Hey, where did my grace period go?

If you’ve deliberately chosen a credit card with a grace period in order to save some interest costs, double check how that card calculates interest. Some cards offer a grace period but end up clawing back any savings by calculating interest using a two-cycle billing method.

In this method, any time you don’t pay the entire balance, interest is calculated on the sum of the average daily balances for BOTH the previous and current months. Even though you only pay this double interest in the first month that you don’t pay all charges, it can set you back just as much as the charges on a credit card with no grace period, especially if you regularly carry a balance.

FATAL FACT TWELVE: Something interesting you should know about interest.

While most credit card companies use the Average Daily Balance method to calculate interest, some include your new purchases in that calculation and others don’t include new purchases. Take a close look at the fine print on any credit card offer to see which way interest will be calculated. Calculations that exclude new purchases will cost you less.