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Understanding and Utilizing Credit Cards - Part 2


Recap of Part 1

In the previous Financial Wellness Newsletter, we ended the article with a discussion on the cost of using a credit card. In the article we covered finance charges, but a finance charge isn’t the only cost. Some credit cards charge an annual fee, late fee, and/or over-the-limit fee. Unfortunately, consumers don’t always understand these costs so laws were implemented in 2010 to protect consumers. One helpful change requires that monthly statements be mailed or delivered at least 21 days before the payment due date. This is a 14-day increase, notifying consumers of their payment obligations. This change can help consumers prepare for bill payment and eliminate late fees. Viewing your credit card activity online is a good method to eliminate over-the-limit fees. Most online accounts will provide the transaction in the billing cycle, pending transactions, and the current balance.

There is a wide-variety of special offers related to credit cards advertised to encourage consumers to take action. Below are two of the most popular:

Open a New Credit Card with 0% Interest Rate on New Purchases

This offer may sound enticing, but consumers must be cautious. A 0% introductory interest rate may encourage a spending spree and when the introductory period ends, the interest rates may be very high. If you can utilize the credit card during the introductory period and have the funds to pay the debt in full before the introductory period ends, this allows you to eliminate finance charges.

Balance Transfers with a 0% Introductory Interest Rate Period

Most balance transfer offers charge a fee to transfer the funds to their account. The fees range from 1% to 5% or higher, which is calculated on the total transfer amount. The balance transfer charges you immediately to utilize their funds. If you transfer a $3,000 balance with a 5% fee, your fee is $150. The beginning statement balance will be $3,150. If you were paying a much higher interest rate on the funds you transferred, this can be beneficial. Keep in mind that at the end of the introductory period, your finance charge will be the amount disclosed when you made the transfer agreement.