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Finding a Better Deal on Credit Cards

If you're going to use credit cards—and it's a very rare person who isn't—you might as well get the best deal on them that you can. Credit cards cost you money, make no mistake about it. But there are ways to minimize those costs.

Annual Fees

Intense competition among card companies has forced most of them to lower, or even drop, their annual fees. A research company in Maryland reports that more than half of all credit cards are available without an annual fee or that the fee will be waived if you ask.

Dollars and Sense

If your credit record is good and you're paying an annual fee on your credit card, write to the company or bank (the address should be on your bill) and ask to have the fee waived. If the bank won't waive it, write again (or call, but it's better to have a written record of everything) and say you're going to switch to another company. Betcha the bank will drop the fee rather than lose a customer.

If you are paying an annual fee, it shouldn't be more than about $20, unless, for some reason, you happen to have a gold card. Those fees usually run about $35 a year or more. If you do have a gold card, ask yourself why. At this stage of your life, do you really need it, or is it an ego thing?

Show Me the Money

An annual fee is a charge you pay to the bank or credit card company for the privilege of holding its card. An interest rate is the amount the bank charges you to use its money to finance what you buy with your credit card.

Dollars and Sense

Be sure you know what the grace period on your card is. The traditional grace period used to be 30 days, but it's getting shorter and shorter. The average grace period is now about 18 days.

Interest Rates

Interest rates do make credit cards interesting, that's for sure. The interest rate is what the bank charges you to use its money to finance what you buy with your credit card.

When you charge a new area rug for your living room for $300, for instance, the store from which you got them collects its money from the bank that issued your credit card. The bank, in turn, gets its money back from you along with interest if you don't pay the $300 back within a spec-ified time. You usually have a grace period, which is a certain amount of time you have to pay off your purchases before you start getting charged interest.

If you pay off your credit card every month, which is the best way to do it, you won't incur any interest charges. Then your credit card is simply a convenient alternative to paying with cash. If you're like most people, however, you won't pay off your bill in full each month. That's where the trouble starts.

If you owe $1,000 on your credit card, and you make only the minimum payment each month, it will take you years to pay off the money you owe, and you'll end up paying nearly as much in interest as you owe on the loan. In plain language, it's a really bad idea to let the interest keep building up on your credit card debt. That rug could end up costing more than twice that amount if you pay them off $10 a month, plus interest.

Fierce competition among card companies and overall low interest rates have forced down credit card interest rates in recent years. Some banks offer credit cards at rates as low as 8.25 or 8.5 percent. You might even see one now and then for as low as 6.5 percent interest, or get a special starting rate of just 2.95 percent or even lower. Be careful, though. Usually those rates only apply for six months, after which time they go up. If you apply for a card with a special starting rate, be sure that you know the ongoing terms of the agreement.

There are cards available for 10 or 12 percent for cardholders with great credit, so if you're paying more than 13 or 14 percent, now is the time to look around for a better rate. For a list of comparative credit card rates, try one of these organizations:

  • CardTrak.com has credit card information and interest rates.
  • Bankrate.com's credit card page provides interest rate comparisons and advice on finding a better card.

When you locate a card with a good rate, go ahead and apply. If you've had a card for a while and you've maintained a good credit record, you should qualify for a better rate. If you've only had a card for a short time, though, it might be harder to get approved for a low interest rate. Still, it can't hurt to try. There's a lot of competition for cardholders, and some places are willing to give you a lower interest rate to keep your business. All you have to do, in some cases, is ask. If you haven't had much time to build up a credit record, and you're not approved for a lower interest rate, be diligent about keeping up with your payments and try again in a year to get a better rate.

Fees and More Fees

As bad as the annual fees and interest rates are on credit cards, it's the other, lesser-known fees that can really add up. No matter how boring and complicated it may seem, make sure you read all the fine print that comes along with your credit card policy. If you don't understand it, call the card company and ask for customer service. Insist that someone answer all your questions. Many people don't fully understand their policies, and they end up paying all kinds of hidden charges as a result.

Some other fees to look for on your own credit card, or when you're checking out an offer for a card, include the following:

  • Late fees. You'll be charged a fee if your payment is late. That's in addition to the interest charges for not paying off your balance by a specified time. Not all banks charge the late fee, so make sure you find out when you apply for the card.
  • Cash advance fees. These are nasty fees, and because they are, you should try to never take a cash advance. When you borrow cash against your credit card, most cards forget about the grace period and start charging you interest right away. About 50 percent of the card companies out there will charge you 2 to 6 percent more interest on a cash advance than on other charges not paid off by the end of the billing period. There's also usually a one-time fee of between 2 and 5 percent for cash advances.
  • Discretionary fees. These fees, imposed on you to pay for things such as credit life insurance or a shopping service that you never ordered, are at the discretion of the card company, not you. Be sure to read your bill carefully, and don't pay for anything you didn't order.
  • Two-cycle billing. Two-cycle billing is extremely unpopular among consumers, and rightly so. This billing method penalizes people who pay off their cards every month for a while, but then get behind and carry a balance. The bank will charge you an extra month's interest every time you begin a balance. This could result in you paying as much as four extra months' interest for a year.
  • Penalty interest rates.
    If your payment is late, if you exceed your credit limit, or if you do anything else to annoy your card issuer, you could be slapped with penalty interest rates, which could add 3 to 10 percent to what you're already paying.

Make sure you read each bill carefully when you get it, and look for any charges you can't account for. If you feel you've been charged for something to which you didn't agree in advance, by all means pick up the phone and talk with someone in customer service. The intense competition between credit card issuers is forcing them to be responsive to consumers' needs and complaints. Make sure you take advantage of it!

More on: Family Finances

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Excerpted from The Complete Idiot's Guide to Personal Finance in your 20s and 30s © 2005 by Susan Shelly and Sarah Young Fisher. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book visit the Idiot's Guide web site or call 1-800-253-6476.


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