Americans are unnecessarily paying billions of dollars a year in annual fees, interest rates, transaction charges, late payment fees, over-the-limit fees, and other charges. Even if you are already in debt, the average credit card holder can save hundreds, if not thousands, of dollars a year on credit card expenses by follolwing the three easy steps below.
STEP #1: Determine How Much Those Colorful Pieces Of Plastic Are Costing You
Name of Creditor | Interest Charges Paid In Last 12 Months | Late Payment Fees Charged In Past 12 Months | Over-The-Limit Fees Paid In Past 12 Months | Annual Fee Paid In Past 12 Months | Total Charges Paid In Past 12 Months Per Credit Card |
Credit Card #1 | $1,476 | $29 x 3 = $87 | ------ | $75 | $1,638 |
Credit Card #2 | $900 | $35 x 6 = $210 | $35 x 6 = $210 | $50 | $1,370 |
Credit Card #3 | $1,900 | ----- | ------ | $35 | $1,935 |
Total Charges Paid In Past 12 Months By Category | $4,276 | $297 | $210 | $160 | $4,943 |
STEP # 2: Reduce Or Eliminate Late, Over-the-Limit and Interest Rate Fees
Late Fees: If you are being assessed late payment charges, try to submit payments before the due date. If you are cutting it close, contact the creditor to determine the monthly date when payments must be received in order to avoid these charges. This date, which varies among creditors, is normally a certain number of days beyond the payment due date. For example, while some creditors may assess late payment charges on the payment due date, most give a five- to ten-day grace period beyond the payment due date for payments to be received and credited to an account. Once your creditor’s policy is determined, make every effort to ensure that your payments are credited by this date.
If You Pay Electronically - These days, most credit card companies make it very easy for you to pay your monthly credit card bill in a timely fashion. Indeed, most offer automatic and Internet bill payment services. Under an automatic payment program, you authorize each creditor to debit your bank account for a certain amount, the minimum payment, or payment in full each month. Then, each monthly payment is deducted from your account like clockwork on the same date each month. Most credit card companies also allow you to access your account online to set-up automatic payments or to manually pay your credit card bill each month.
If You Pay Manually - To allow for any delays, send your payments a couple of days prior to their due dates. This should protect you against being assessed a late payment fee as well as assuring the favorable reporting of your account with credit-reporting agencies. Follow your creditors’ instructions concerning how, when, and where to make bill payments. Make sure your payments are mailed or delivered to the address indicated for receipt of payments by your credit card company. If you pay by check, write your account number on the check.
If you are bumping up against a payment due date, most creditors now accept over-the-phone payments by check. Virtually instantaneous, you simply call the creditor to make payment arrangements. You then provide account information that is on a paper check from your financial institution and authorize that a particular check number be used by the credit card company to debit your account. A one-time payment in the dollar amount you authorize will be deducted from your banking account and credited to your credit card account. While some credit card companies do not charge for over-the-phone payments by check, some do. So, check with your creditor for hidden charges before paying by check over the phone.
If you suspect you are going to be late on a payment, consider calling your creditor. Explain the reasons for your tardiness, giving the date by which the creditor should expect payment. If possible, try to make at least a partial payment by the due date. The remainder of the payment should be made as quickly as possible.
For seven of the past twelve months, Charles’ outstanding balance has gone over the allowable limit on his credit card. At $35 a pop, these fees have cost Charles a whopping $245, even though his credit card company keeps letting him go over his limit.
Over-The-Limit Fees: If you are being charged over-the-limit fees, try to bring your indebtedness below your approved credit limit. Should you have difficulty accomplishing this, determine the balance beyond which this fee is assessed. Some creditors assess an over-the-limit fee if you go a penny beyond the credit limit; others charge if your balance exceeds your credit limit by 15 percent. Once this point has been determined, make every effort to bring your balance below this point, and strive to bring your indebtedness below your approved credit limit. If you are unable to do this, contact the creditor to request that your credit limit be increased to the level of your current balance, so further over-the-limit fees can be avoided. If this is done, assure the creditor that account balances will remain below the revised credit limit.
Interest Rate Charges: Interest rates have declined in recent years. Many people, however, continue to pay high interest rates – 18% and more – on some credit cards. Most people, when filling out Table 1 above, are startled to discover just how much they are paying in interest on their credit cards. Imagine what you could be doing with the money you are now paying in credit card interest! Just think about how much those items you purchased several months or several years ago are costing you after interest payments are factored into their cost.
Amanda & Ed are trying to pay off their high interest rate credit cards. But, they are having trouble figuring out which interest rates are being applied to which types of charges on their cards.
It is becoming increasingly difficult to determine the interest rate that you are paying on your credit cards. That is because most creditors now have tiered interest rate structures where you are charged one rate for purchases and another for cash advances and convenience checks. Many companies offer promotional lower interest rates for balances that you transfer to their card from another credit card company. In addition, many card issuers offer better interest rates to their best customers and charge higher rates to people they consider to be higher credit risks. What’s more, even though you may have obtained a credit card at a reasonable initial interest rate, most credit card agreements now allow creditors to jack up your interest rate if you fall behind on your payments or if your financial circumstances change while you are a cardholder. These changes can be accomplished without notice to you, that is, if you fail to read the fine print in the finance charge box on your bill.
Some Examples of Finance Charges
Warning: If the next couple of paragraphs of numbers and charts confuse the hell out of you. Don’t worry. Just forget them. It gets easy again after the charts. |
A typical finance charge box on a monthly credit card bill will look something like this:
| Annual percentage rate (APR) for purchases | 3.9% until 11/1/02, after that, 14.9% |
| Other APRs | Cash-advance APR: 15.9% Balance-transfer APR: 15.9% Penalty rate: 23.9% See explanation below. |
| *Variable-rate information | Your APR for purchase transactions may vary. The rate is determined monthly by adding 5.9% to the Prime Rate |
| **Grace period for repayment of balances for purchases | 25 days on average |
| Method of computing the balance for purchases | Average daily balance (excluding new purchases) |
| Annual fees | None |
| Minimum finance charge | $0.50 |
| Transaction fee for cash advances | 3% of the amount advanced |
| Balance-transfer fee | 3% of the amount transferred |
| Late-payment fee | $25 |
| Over-the-credit-limit fee | $25 |
* Explanation of penalty. If your payment arrives more than ten days late two times within a six-month period, the penalty rate will apply. | ** The Prime Rate used to determine your APR is the rate published in the Wall Street Journal on the 10th day of the prior month. Source: Federal Reserve Board |
Given the above, it is in everyone’s best interest to pull out their credit card statements and read the fine print in the finance charge box to determine just what you are being charged for the privilege of using plastic. Place this information in Table 3 below.
Name of Creditor | Interest Rate For Purchases | Current Purchase Balance | Cash Advance Interest Rate | Current Cash Advance Balance | Penalty Interest Rate | Current Penalty Balance |
Credit Card #1 | ||||||
| Credit Card #2 | ||||||
| Credit Card #3 | ||||||
| Credit Card #4 | ||||||
| Credit Card #5 | ||||||
Credit Card #6 | ||||||
| Credit Card #7 | ||||||
| Credit Card #8 | ||||||
| Credit Card #9 | ||||||
| Credit Card #10 | ||||||
| Credit Card #11 |
After you have listed all of your credit card information on Table 3, highlight the obligations at the highest rates of interest. Since these expenses are costing you the most money in interest charges, they should become priority repayment obligations. The sooner you are able to pay them off, the less money they will cost you.
Here is how Table 3 might look with some of the information filled in and several priority payment debts identified (1=first, 2=second, 3=third)
The balances below are the total balances on which interest charges are computed. For example, the current purchase balance of $600 for credit card #1 is being assessed an interest rate of 18.9%. So, 1/12 of 18.9% is assessed on the outstanding balance each month over the course of the year. Most creditors these days have penalty interest rate clauses in their contracts that allow them to bump up the interest rate if a consumer is late on or defaults on a couple of payments. This is not a one-time charge. The entire balance becomes payable at the much higher penalty interest rate. For example, if you’re paying 14.9% on purchases then experience some repayment problems, your entire balance gets moved over to the 23.9% rate as demonstrated with credit card #4 below.
| Name of Creditor | Interest Rate For Purchases | Current Purchase Balance | Cash Advance Interest Rate | Current Cash Advance Balance | Penalty Interest Rate | Current Penalty Balance |
| Credit Card #1 | 18.9% | $600 | 18.9% | $0 | ---- | ---- |
| Credit Card #2 | 3.9% | $1,700 | 17.4% | $2,300 | ---- | ---- |
| Credit Card #3 | 14.9% | $600 | 19.9% | $2,100 | ---- | ---- |
| Credit Card #4 | ---- | ---- | ---- | ---- |
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