Paying only the monthly minimum: Many Americans make the mistake of paying only the minimum amount owed on their credit card on a monthly basis. Paying only the monthly minimums can add years to the amount of time it takes to pay down your debt completely. A majority of your minimum monthly payment goes towards paying down the monthly finance charge on your card, leaving little towards actually paying down the actual balance of the card. Paying even only double the monthly minimum can cut down on the time it takes to pay off a debt by a substantial amount.
Late Fees: Missing even one credit card payment can be extremely detrimental to paying down your debt. Many credit card companies charge a fee if your payment is made only one day after the due date. A tardy payment can also lead to an increase in your annual APR. A recent article on Forbes.com warns that “each time you are late the card issuer can reset your APR to the default APR or ceiling APR.” If you have signed up for a zero percent APR card, missing a payment can nullify your zero percent APR for the remainder of the deal.
Zero Percent Intro APR: These offers are often very attractive at first glance, but beware to read the fine print before signing up for one of these deals. According to the aforementioned article on Forbes.com, “most 0 percent APR offers are for balance transfers only. Any new purchases or cash advances will be subject to a much higher interest rate.” Often times the fact that new purchases or cash advances are subject to higher interest rates is not made highly visible unless you read through the entire disclaimer. Additionally, balance transfers to new credit cards often come with a transaction fee (usually 4%) which is automatically added to any transfer amounts. This means that the consumer is paying 4% just to move the money around – you might be getting 0% APR for six months, but you pay 4% upfront to get it. Making new purchases or using the card for cash advances can nullify any chance of utilizing the zero percent APR to more quickly pay down your debt. Remember to always read the fine print on any credit card offers.
Fixed Rates: A fixed rate credit card, as opposed to a variable rate credit card, is enticing to a credit card holder because it ensures you that you will be notified in advance if there is a change in your annual APR. However, this does not mean that your rates cannot be changed. The credit card company can still change the interest rate at any time, and for any reason they see fit. Most cards are attached to the “Prime Rate” (currently at 3.25%). This means that banks and credit card issuers will charge a “fixed rate plus prime.” If the prime rate goes up, so does your interest rate.
Inactivity/Annual Fees: Inactivity and annual fees (also known as membership fees) are fees that the credit card companies charge simply for holding the card. These fees can be a set amount determined for a yearly basis, or a set percentage of the total credit limit on the card. Many times companies will offer a “No Annual Fees” promotion to bring in new customers. This offer is usually only for a set period of time, not for the entire period you hold the card. In addition, if you do not spend enough on a card over a specific period of time, card companies can also charge inactivity fees, which vary from company to company.
I also asked Mark a few additional questions.
1) ) How can something like credit card debt lead to bankruptcy?
Credit card debt
tends to lead to bankruptcy or financial problems in general because
people will spend more than they can pay back and when interest accrues
they find that they are unable to pay more than minimums which leads to
an endless cycle of paying nothing but fees and interest.
2) What are some responsible ways consumers can use credit cards without getting into trouble?
The best way to use a credit card is to pay off the balance on a monthly
basis, therefore avoiding any interest or fees. In fact, if you are
able to use credit responsibly, you can improve your credit rating and
even earn rewards such as cash back or gift cards. Credit cards should
be used for short term financing (i.e. less than 6 months). This means
that you should only charge or finance a purchase which you can
definitely pay off in under 6 months including interest or finance
charges. If you can’t afford an item on your normal salary, a credit
card is not the answer to getting it. Ask yourself: Do I really need
this? Is this purchase going to pay for itself in six months? Can I
budget to pay this item off in less than six months? Would I buy this
item if I did not have a credit card to finance it? If you answered
“NO” to any of these questions, don’t buy it.
Credit can be a great tool for consumers or small business. It can help
finance operations or pay for essential items. It is important that a
consumer or a small business realize that a credit card is convenient
financing. It should be treated as such. It is easy to forget that
most credit cards have higher interest rates than a traditional loan and
it is easier than ever to swipe a card to make a large purchase. Don’t
fall into the trap of “easy money”.
About Hughes, Laws & Scheive, P.C.: Guided by the principles of excellence and professionalism, Hughes, Laws & Scheive (HLS) provides superb client service and unparalleled legal guidance to clients in northern Illinois. The Chicago-based law firm focuses on providing a simple, stress-free experience to clients who are determining whether bankruptcy is the right option for them.
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