Five truths about credit cards

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Five truths about credit cards
2 years ago
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Different company names, interest rates, and reward points programs are mute. In the end, every major credit card shares the same genetic makeup. Customers trade paid interest for increased convenience and to lose ATM fees. Rarely is this trade balance even, and credit card companies therefore make a profit. Other than the basic way major credit cards work, each of them also find commonality in five truths.

The five truths about credit cards are:

The minimum payment due yields the maximum profit to the credit card company.

A typical minimum payment formula involves a token amount to cover administrative costs plus a small percentage of outstanding balance. Customers pay this minimum amount due without any real guarantee of significant decrease in principle. This prolongs the repayment period and the amount of interest the credit card company charges which the customer in turn pays. Want to avoid the harsh reality of this truth? Calculate your own minimum payment by adding the amount of interest added on the last billing statement plus the amount you wish contribute to decreasing principle.

0% is always a teaser interest rate and it expires.

A completely 0% traditional credit card is a fictional being. Any credit card with a pure 0% interest rate will have a hefty user fee, also called an annual fee, and likely require balances paid in full each month. Credit card companies use the 0% teaser interest rate to entice customers from other companies. After all, if you are paying interest to one company, why not pay that interest to us? Smart customers will immediately call when the teaser interest rate expires to negotiate a lower APR if they do not pay off the principle balance before the expiration date.

The closer your outstanding balance is to your credit limit, other lenders consider you a greater "credit risk."

One of the most crucial calculations for credit score is the ratio of outstanding debt to credit limits, taken directly from your credit report. The assumption is this-- customers using a credit card near the point of a credit limit have some underlying factor preventing them from paying it off and are not likely to handle additional credit well. This credit score factor can even undermine a faithful monthly payment history. Therefore, it is typically better to pay down debt if your outstanding balance is over 50% of your total credit limit before submitting new credit applications.

The most important information is always in the smallest print.

Few customers are ignorant to warnings about reading the fine print. Unfortunately, in recent years credit card companies have embedded some very nasty terms in there thanks to relaxed legislation regulation. "Default" interest rates are sky high and even the definition of "default" is grossly changed. Now, these APRs of 23.99% and above are immediately instituted when a customer exceeds a credit limit, is late on one payment, or fails to make the minimum payment due. It is vital customers do not give credit card companies any ammunition to raise the APR, and if it happens to immediately call and inquire about a reprieve.

You are not responsible for large charges when your credit card is stolen.

Despite trumped fears of identity theft and tons of "credit monitoring" programs advertising insurance up to $10,000 in the event of unauthorized charges, little of this is needed. Credit card companies do not hold customers responsible for charges in excess of $50 if the company is notified immediately when it is realized the card is stolen. Credit card companies keep insurance themselves for this problem, and the worst scenario a customer faces is the hassle of notifying creditors. For true protection, ask your credit card company to freeze your card on any out of state purchases unless you tell them you are going out of town. Credit card companies like American Express institute this safeguard automatically.

The real differences in credit cards are not in the very nature, but the packaging and peripherals. Points for reward systems are accumulated in different ways, and most credit cards have some type of unique feature to entice consumers. Consumers should carefully consider credit card offers just as they weigh any large purchase such as a car or major electronic. Know the features, negatives, and expectations of each piece of plastic you place in your wallet. To start, you can count on every credit card to share in the same five truths when it comes to minimum payments, teaser rates, credit score impact, small print, and stolen credit cards.

By: Elizabeth Ann West
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