Step by Step: Credit Cards and You

Plastic? Fantastic! But Buyer Beware...

By Susan Biagi

Jobseekers will often lament, “If I only had a job, my life would be perfect.”  

A new job, however, can’t solve old problems.

Consider credit-card debt: a new job will sometimes eliminate that debt—for awhile. Too often, however, the debt starts creeping back. This is usually because the problem is not the lack of funds, but the underlying behavior. People with high incomes find themselves riddled with debt just as often—or more often—than people with low incomes.

Credit is easy to obtain in our society: university students and others with no income frequently receive multiple offers for credit cards. Unless they’re very careful, students can become enslaved to credit card debt early in their lives and remain that way for decades.

Unfortunately, many cardholders remain totally unaware of how credit cards work. The following are a few basic facts to help people conquer their debt issues:   

  1. Fact #1: The interest rate offered to cardholders varies widely, depending on the following:

a)      The cardholder’s credit history: someone with a poor credit history, or none at all, will usually be offered the highest interest rate, often around 19%; someone with a good and lengthy credit history will pay as low as 9.99%.

b)      The type of card chosen: cards that offer rewards will often charge a high interest rate as well.

Variations in interest rates hardly matter to cardholders who pay off their bill in full every month. But when trouble hits, in the form of a job loss or injury, that interest rate will make a huge difference. Compare for example, the following scenarios. Two cardholders have each racked up $5000 in credit card debt. Cardholder #1 will pay 19% interest on that $5000, while cardholder #2 will only pay 9.99% interest.

Solution: People with no credit history, or a poor history, may have to accept a credit card at a higher rate of interest. This is a situation that should be remedied as quickly as possible. Once cardholders establish a good credit rating with their current credit-card company (by always paying the balance in full, for example), they can then request a lower rate of interest. In fact, once a credit history improves, other companies will step in to offer lower rates. Cardholders can simply inform their existing company of these offers and threaten to switch companies if the current rate is not lowered.

 

  1. Fact #2: Cash advances are a dangerous use of credit cards—perhaps the most dangerous of all. When credit cards are used to purchase goods, there is usually a grace period of at least 21 days, during which no interest is charged on that purchase. Unfortunately, there is no grace period on cash advances, which start accruing interest immediately. This interest accrues daily, often at a higher interest rate than the rate charged on purchases. In addition to the interest, some credit-card companies charge a fee to process cash advances, while ATMs may charge still another fee, depending on the bank.

Solution: Avoid cash advances. It makes better financial sense to purchase groceries or pay utility bills as straight credit-card purchases, rather than using cash advances to cover such items. This lets the cardholder take advantage of the interest-free grace period.

  1. Fact #3: Unless the bill is paid in full each month, interest will be charged on all purchases. Imagine that a cardholder charges $500 in purchases in a given month. That same cardholder manages to pay the company $475 before the grace period ends. It makes sense to believe the cardholder will only be charged interest on the remaining $25, right? Wrong! Interest will be charged on the entire $500. Furthermore, if the balance is not reduced to zero before the next billing period, the grace period is lost on any additional purchases.

Solution: Bring the full balance down to zero before the grace period ends. If a cardholder is unable to bring the balance to zero, that person should avoid making additional purchases, to avoid accruing even more interest.

 

Jobseekers who could benefit from additional information on credit-card use are invited to attend Career Link’s “Credit Cards and You” workshop. To register, call us at 604.485.7958. It’s easy and it’s free! Visit our site at http://careerlinkbc.com

 

 

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