Financial Stability

Managing Your Credit Cards

Credit card companies are in business to make money, and most of that money is extracted from those who carry the cards. As a result, these companies have a variety of ways to maximize their profits and keep you on the hook for payments.

It is working. According to the Federal Reserve Board, American credit card debt has reached $1 trillion and the average U.S. household owed $9,840 to credit card companies in 2007.

Here are some Pesky Credit Card Tricks and how you can avoid getting fooled by them:

Easy access: Experts say that the typical American carries seven credit cards and two debit cards. That's too many. Though companies might bombard you with offers, try to limit yourself to three credit cards - and never pay an annual fee for any of them.
Luring the young: College students often are easy prey for credit card companies, which frequently lure them with free T-shirts, baseball caps or other goodies. More than 75 percent of all U.S. undergraduates currently hold credit cards and their average unpaid balance was a frightening $2,169 in mid-2008. It is especially vital that college students are aware of the dangers of credit card debt.
Promotional rates: Zero percent interest rates are too good to be true, and they are true only for brief introductory periods. At that point, interest rates will rise sharply, reaching an average of about 12 percent but also ranging much higher.
Minimum payment requirements: These low payments get lower all the time. That might seem like a favor, but it is not. Mounting interest charges on the unpaid balance could cost you a fortune and keep you in debt indefinitely. So concentrate on shedding the entire debt as quickly as you can. Credit card companies make more money by letting you make the lowest possible payment and keeping your debt in place. See our Credit Card Payment Calculator.
Grace periods: You are not charged interest if you pay off your entire balance each month within the grace period - but, if you do, credit card companies do not profit from your debt. As a result, some companies have reduced grace periods from the original 30 days to 20 days or less. Knowing your grace period and paying off your entire balance every month can save you money and keep you out of trouble.
Cash advances: Interest is charged as soon as you slip the cash out of the machine and rates can climb as high as 30 percent. It is much more expensive to use a credit card at an ATM than to use a bank debit card.
Late fees: The average fee for a late payment - even one day late -- in 2007 was $35. Check your card. Read the small print. Pay on time. Avoid unpleasant surprises.
Two-billing cycle: Interest is charged on your purchases from the current billing cycle and the month before. The most consumer friendly system is the adjusted balance method, in which interest is charged on the account balance after payments and credits during the billing cycle. The average daily balance method - which is spreading through the industry - charges interest on your average daily balance during the billing cycles, and is likely to cost you far more.
Penalty-box interest rates: If your payment is ever late, your interest rate may rise substantially from 12 percent to 20 percent -- or more.
Penalty fees on other cards: If you go over the limit or pay late on one card, you could be punished with higher interest rates or fees on other cards as well.
Terms change on short notice: Companies are required to give only 15 days notice before changing interest rates. Even with a "fixed" rate, your interest can be changed at anytime.

go back to top