Credit Cards

The miracle of plastic

It’s so convenient. Pull out a plastic card and you can purchase a designer suit at that new boutique, dinner at your favorite restaurant, groceries at the supermarket–or all three. Need cash? Use the card at a nearby automated teller machine (ATM) and walk off with a fistful of dollars. Want to get away from it all? Book the flight, provide your account number, and you’re on your way.

Buy now, pay later

That innocuous piece of plastic unlocks access to a revolving line of credit, one that allows you to make purchases (or get cash advances) now and pay for them later. When you apply for the account, the card issuer determines a credit limit, which is the maximum balance you may carry. As you make purchases (or incur finance charges and/or other creditor fees), your remaining available credit decreases. If you attempt to make a purchase (or take a cash advance) that will cause your account to exceed your credit limit, your transaction will be denied unless you agree to allow it (and accept the over-the-limit fee that comes with it). As you make payments against your outstanding principal balance, your available credit increases.

And pay and pay

You’ll be expected to pay for the purchases (or cash advances) that you make, as well as for the use of the lender’s money. The normal finance charges on credit cards can be high, even in times of low interest rates. In addition, if you’re late making payments, the lender may start charging you an interest rate higher than the standard rate (to offset the repayment risk you pose) and/or other fees that can make using your card even more expensive. If you make only minimum monthly payments on your account, you may find the card’s convenience coming at a high price.

Applying for a credit card

Credit cards are available from banks, credit unions, retail stores, and even oil companies. If you have reasonably good credit, all you’ll need to do to apply for a credit card is sort through the offers stuffing your mailbox. You may even be “pre-approved” for a card. This means only that the creditor making the offer has decided, based on its general criteria for eligibility, that you’re a good candidate for credit. Actual acceptance will come only when you’ve completed the credit application and the creditor is satisfied with a review of your personal information and credit history. In most cases, you can complete an application for a credit card by providing information about yourself on paper, over the telephone, or via the Internet. Once the creditor has your information, you’ll probably receive a reply within hours; if you’re approved, you’ll have your card within a few days.

Even if you have a blemished credit history, it’s likely you’ll still receive a credit card. However, the greater the risk the creditor perceives you to be, the higher the interest rate you’ll be charged when you “charge it.” Before you accept a credit card, be sure you understand the specific terms and conditions of its use. The basics of these terms and conditions are usually spelled out in the application material, and detailed information is included in the cardholder agreement you receive with the card itself.

Using a credit card properly

Used properly, credit cards can offer you financial leverage you might not otherwise enjoy. If you pay off your balance in full each month, your credit card account acts as a short-term, interest-free loan. This can help alleviate cash flow problems. You can also use a credit card to make large purchases sooner than you could have otherwise, and to buy items when they’re on sale.

The convenience offered by credit cards can often lead to overspending, however. Monitor your card usage and balances. Understanding how to read your monthly credit card statements can help you do both. Make sure your monthly payments fit comfortably within your budget. Learn the signs of credit abuse, and how to avoid becoming an abuser. You’ll also want to take certain steps to reduce the likelihood of becoming a victim of credit fraud.

When it’s payback time

The outstanding balance due on your credit card account is the total amount you owe the creditor at any given moment. It includes any unpaid balance carried over from your previous month’s statement, plus any new purchases, accrued interest, and other charges (such as late and over-the-limit fees), less any payments you’ve made or reversed charges (e.g., returned merchandise refunds) that have not yet been posted to your account.

There are several approaches you might take to paying off your outstanding credit card balance. These include:

  • Paying the balance in full each month
  • Making the minimum monthly payment
  • Transferring the balance to a credit card with a lower interest rate
  • Refinancing the debt as an unsecured personal loan
  • (If you are a homeowner) refinancing the debt with an equity line of credit

Each strategy has its costs and benefits, and you should weigh them carefully before you decide what approach you may want to take in managing your debt. If you become overwhelmed with credit card debt, there are companies that will help you calculate a repayment strategy to rid yourself of your burden.

You’ve got a right

Your consumer rights related to credit cards are protected by various federal laws. The Fair Credit Reporting Act (FCRA) helps make sure that the credit-reporting agencies, or credit bureaus, furnish correct information about you to those evaluating your application for credit. The Equal Credit Opportunity Act (ECOA) ensures that, when you apply for a credit card, you won’t be discriminated against because of your gender, race, marital status or age. The Credit Card Accountability Responsibility and Disclosure Act (the Credit CARD Act) limits when credit card issuers may increase interest rates and bans certain billing and payment practices. The Fair Credit Billing Act (FCBA) limits your liability for unauthorized purchases, offers protection against billing errors, and may help you reverse the purchase of inferior goods or services charged to your credit card. If you run into difficulty repaying your debts, the Fair Debt Collection Practices Act (FDCPA) spells out what practices collection agents may and may not use to collect them. But you must also know your responsibilities and what steps you must take to exercise these rights.

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