Credit Cards: Precautions for Choosing or Using a Credit Card
Credit cards can offer tremendous benefits. Unfortunately, many people make
mistakes when choosing and using credit cards, and then pay the consequences
later with extra costs, excessive debt, and frustrations that could have been
avoided. Here are some errors many consumers make and tips to avoid these
errors.
- If you get an offer for a card with no annual fee, be sure to consider
whether the interest rate is higher than what you are currently paying. You
could end up paying far more in interest charges than on annual fees.
- If you choose a card primarily to get free airplane tickets, bonus points
toward trips or cars, cash rebates, the logo of a favorite organization or
sports team on a card, or other "rewards, " you could end up paying more in
fees or interest than the value of the "freebies." This does not include cases
in which people buy items they might not otherwise buy- just to rack up more
points or miles on their card.
- If you expect to pay
your credit card bill in full each month, your best bet is a card with no
annual fee and the kinds of rebates or rewards you expect to use the most. If
you do not expect to pay your card balance most months, go for a card with a
low interest rate and the right mix of rebates or rewards to justify any fees.
- Find out if a potential
card's interest rate increases after six months or so. Also, there may be a
low introductory rate that only applies to balances you transfer to your card
from other loans or cards you have, and not to any new purchases you put on
the card. Be aware that an interest rate advertised as "fixed" still can be
changed with advance notice to card holders. If your card company does raise
your rate for any reason, that new rate usually will apply to any outstanding
balance plus new purchases.
- If you routinely carry
a balance on your credit card, pay closer attention to how your interest is
calculated. The most common methods for consumers is the "average daily
balance" approach, where you would have a 15- to 30-day "grace period" to pay
before incurring charges on the daily average for that period. However, a few
cards have much costlier calculation methods, including the "two-cycle"
system. Under that method, if you pay in full one month but only pay part of
the bill the next month, you'll be charged interest for both months instead of
just one.
- "Pre-approved" offer
does not mean that you are guaranteed a card. It means a "pre-screening"
indicates you may meet the income, employment, and other criteria that the
card company might want in a customer. You still must apply for the card and
await the results of a credit check. You are also not guaranteed the credit
limit stated in your offer.
- Before you sign up for
a credit card, carefully review the solicitation and the application. By law,
key terms must be disclosed; they are usually described in a separate box
somewhere on the application form. If after reviewing these documents you do
not understand something, call the card issuer and ask for an explanation.
- It is a big mistake to
assume that interest rates, credit limits, grace periods and other card
features are pretty much the same no matter which card you choose.
- You can shop for good
deals nationwide, for free. Twice a year, the Federal Reserve Board collects
and publishes
the interest rates and other terms being offered by many card issuers. The
Fed makes this information and general shopping tips available on their web
site section,
"Shop: The
Card You Pick Can Save You Money." It's also available by mail (Federal
Reserve Board, Publication Services, Washington, DC 20551). Major consumer and
financial publications regularly list cards and toll-free phone numbers as
well.
- You should have only a
few credit cards. It is good to have more than one card, especially if your
credit limit is not high enough on one card to suit your needs. Experts agree
that two or three general-purpose cards and a few (if any) cards issued by
stores or oil companies should be enough for the average family. Having too
many cards makes overspending too tempting. They also become part of your
credit history.
- Do not get too deep in
debt. If you do have a serious debt problem, there may be corrective steps you
can take involving your credit cards. For example, you can reduce your
expenses by paying off the balance on your highest-rate accounts first (those
that charge the highest percentage of interest), even if you have higher
balances on others. Also, you can pay for future purchases using a
debit card (see
Banking),
which deducts funds directly from your bank account. There also are reliable
credit counselors you can turn to for help at little or no cost.
Unfortunately, there also are scams masquerading as "credit repair clinics"
and other companies that charge big fees for unfulfilled promises or services
you can perform on your own.
- Be careful to pay your
credit card bill or you may face interest charges on the outstanding balance
plus your new purchases. Do not pay with a check that will bounce (when there
is insufficient funds in your checking account), and do not exceed your credit
limit or you can end up paying $20 to $30 penalties.
- "Cash advances" (such
as using your credit cards to obtain cash at an ATM or teller window, or using
one of the blank "convenience checks" that card companies send to you) can
carry sizable up-front fees (often two percent of the amount advanced and not
less than $2), which may translate into a higher interest rate than when you
normally use your card for purchases - plus there is usually no grace period
before interest begins accumulating for cash advances. It may be better to
write a check from your bank account, use a debit card, or charge normally
rather than paying in cash.
- If you skip a payment,
or pay only the minimum required each month, when you really can afford to pay
the balance, you will pay more money in interest charges than necessary (it
could add up to thousands of dollars and a debt that takes 10 or 20 years
longer to pay than necessary). Also, your card company may begin to see you as
a higher risk and decide to increase your interest rate.
- Card issuers are
required to give you notice (typically at least 15 days) before increasing
your interest rate, lowering your credit limit, adding fees and penalties,
reducing or eliminating your grace period or cutting back on bonus programs.
Be sure to monitor your monthly billings or other mailings from your card
company, or you could end up paying more for a credit card than the original
offer, without even realizing it.
- Check your monthly
statements for overbillings. If there is a problem with your monthly bill,
immediately call your card company's toll-free number to report the matter.
Follow up with a note that includes your name and account number, and details
why the charge is incorrect. Send your note to the address designated on the
bill for handling errors; do not send it in the same envelope with your
payment. If you do not receive an answer or acknowledgement within 30 days,
follow up in writing using certified mail for proof of arrival. Keep a copy of
all correspondence for your records. And be aware that you are still expected
to pay the rest of your bill that is not in dispute. You must report the
problem to your card company in writing within 60 days of the postmark of the
bill.
- Take precautions
against lost or stolen cards. Under federal law, if your credit card or card
number is used by a thief, you are liable for no more than $50 per card. If
you contact your card company before any unauthorized charges are made, you
owe nothing.
- Never give your card
number, confidential "PIN" (personal identification number) or similar
personal information over the telephone unless you originate the call to
someone who you know is legitimate. Save your receipts to compare to your
monthly card statement. If you receive new card applications and blank
"convenience checks" that you do not intend to use, destroy them immediately.
- Notify your card
company immediately if your card is lost or stolen, or if you spot something
unusual in your monthly billing. If you've been a victim of fraud, also
contact the
National Fraud Information Center online or by phone (800-876-7060). The
NFIC is a project of the National Consumers League in Washington, and it
reports suspected frauds to the appropriate law enforcement agencies.
- If you do not use a
card anymore, cancel it. Too many cards on your credit record could prompt a
lender to reject your application for a mortgage or some other loan. Even if
you do not find the card of much value, a thief who takes it from your home or
wallet can use it fast!
- Once you decide to
cancel a card, take precautions. Send a letter to the card issuer stating that
you decided to stop the card. This clarifies, for your credit records, that
the card was closed by you and not by the card issuer because of any problems
you may have created. Also, cut up your old card and dispose of it in such a
way that a thief rummaging through your trash cannot piece it together and get
your account number and expiration date.
Next ==>>
When You Receive Your Card
Table of Contents:
-
How to establish
credit
-
Types of Credit Card Accounts
-
Precautions for Choosing or
Using a Credit Card
-
When You Receive Your Card
- Your Rights and Protections
-
What is a Credit Report (and How Do I Get Mine)?
-
How to Dispute Credit Report Errors
-
Unauthorized Use of Your Account: (What to Do if Your Identity
is Stolen)
-
Help and Resources
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