Thursday, June 29, 2006

Credit Card Fees Part Two

Third Party Late Payments and potential Credit Card Default
If you were over the limit on your card, or late in making monthly payments, you would expect to be in trouble with the credit card company. However, there is more to be concerned with than just paying on your credit card in a timely manner. Beware of third party default issues. A credit card company may penalize you for being late on some other (third party) payment! Here is an example of language lifted from an actual credit card agreement:

You default under this Agreement if you fail to pay, by its due date, the Minimum Amount Due listed on each billing statement; fail to make a payment to any other creditor when due;…

The beginning text in the clause is obvious, if you don’t pay this particular credit card statement on time, you will be punished. However the next clause is more subtle. I added the underlining and bold print for emphasis. This failure to pay another creditor issue is triggered if the other creditor (third party) notifies a credit agency of your delinquency, i.e. your Credit Report is updated.

For example, if you pay your cable bill (a third party) late, but always pay your credit card bill on time, the Credit Card Company may still hold you in default!

Annual fees
You should not be paying any annual credit card fees unless you have issues with your credit rating. If you do have such fees, call up your credit card company and see if you can get them dropped. In any event, you shouldn’t apply for any credit card that charges up front fees just to process your application.

Credit Card Payment Protection Plans
Beware of credit card companies trying to get you to sign up for a “payment protection plan”. These plans will typically pay or defer payments on your card account in the event you are laid off, fired, have an extended illness, etc. If you are in fact retired and your retirement funds are the main source of your income, then you should ask yourself what is the advantage for such a plan to me? These plans are not free with costs usually based upon your monthly charges. You still pay a fee even if you pay off your balance each month. Note, even if you do depend on a job for some of your critical income, you should still look long and hard at such a plan before signing up. Don’t be enticed just by some type of incentive check.

When such plans do kick-in, they usually will only make the minimum amount due, or just defer any payment at all. They may suspend interest charges, but again, if you are paying off your balances each month and are getting all or the majority of your income just by being alive at the beginning of the month, you have to ask yourself: “What’s the real benefit here?”

Raising the Rate!
Consider the following statement lifted verbatim from the back of a credit card offer:

You understand that the terms of your account, including the APRs, are subject to change. This means that the APRs for this offer are not guaranteed; APRs may change to higher APRs, fixed APRs may change to variable APRs, or variable APRs may change to fixed APRs. We reserve the right to change the terms (including the APRs) at any time for any reason, in addition to APR increases that may occur for failure to comply with the terms of your account. Any changes will be in accordance with your Cardmember Agreement.

The bold print is as used in the actual statement. Hmm, “at any time for any reason”, would you sign a contract that contained such language?

Your interest rate on revolving balances (the amount remaining on your charge balance after you make a payment), can change any time at the sole discretion of the credit card company! Check your particular Card Agreement under the “Changing this Agreement” section. You may start out with a very low rate and be tempted to build up a large revolving balance. You may also think that your rate is safe so long as you don’t default under your Card Agreement, which generally means that you pay all of your creditors on time and don’t exceed any of your credit limits. However, this is not the case, your rate can rise at the sole discretion of the company no matter how good you’ve been. Also be aware that your credit line can also decrease which could impact future purchases that you may make. Typically such changes can be made via a special letter to you or simply by just appearing on your next statement. Always look at the credit line amount and applicable interest rate(s) on every statement to see if any changes have been made.

All of these cautions and admonitions add up to the importance of attaining the goal of using zero-balance credit cards for all of your charge transactions.

No good deed …
The following observations trigger remembrance of the cynical diatribe: “No good deed shall go unpunished!” As pointed out above, a credit card company can increase your interest rate for any reason. Some of these “any” reasons are listed below:

Interest rate increases on inactive credit cards
Before digging out an old credit card for some emergency use i.e. a situation in which you may end up carry a balance for a few months, you may want to check on the current interest rate. Just because you had a low rate when you initially got the card doesn't mean that it is still in effect. The low rate could have simply expired, or the company could have arbitrarily increased your rate.

Too much available credit
If your available credit increases on your credit report, a given credit card company can use this against you by raising your interest rate. They may view this increase in available credit as a potential threat in your ability to pay off your debts. Note this is a “potential threat” since; in fact you are still paying all of your current obligations on time! These available credit increases could be trigged by you getting an additional credit card.

Loan Inquiries
If you simply apply for an auto loan or a new mortgage, whether or not you actually follow through with the purchase can also trigger higher interest rates by some credit card companies.

Vanishing Grace Period
When looking at new credit card offers, check for the grace period - the amount of time you are allowed to pay off your total outstanding balance without being hit with a finance charge. Historically, almost all credit card companies offered some type of grace period although the length of such a period has been shrinking (35 days down to around 20 days).

Two-cycle billing credit cards
The two-cycle balance method is where the interest on your average daily balance is computed using both your purchases from that billing cycle and those from the month before. This is the case no matter how much you paid the month before - even if you paid of the prior balance entirely. Hence, it would take you two months instead of one to get back to a zero balance standing. This subtle nasty is triggered by going a month without paying off the entire balance in full. As long as you continue to pay off your credit card each and every month, you will not be affected by this method.

Stay tuned for more Budgeting Information!

Monday, June 26, 2006

Credit Card Fees part one

Other than high interest on outstanding card balances, credit card companies and extract dollars from the unwary in a variety of ways. Some of the common additional fees arise from the situations discussed below.

Note, if you are using your credit card at an ATM, or credit card checks to pay recurring bills such as mortgage or car payments you need to recognize that you are in dire straits! You need to seek out some type of credit counseling as a priority. This type of activity can quickly lead you down the road to ruin if not nipped in the bud!

Avoid using a credit card at an ATM
Avoid using your credit cards to get cash from an ATM. Such use will cause you to be charged a fee for use of the ATM, an additional fee from the Credit Card company, and for interest to immediately start accruing against the cash withdrawn amount (even if your initial credit card balance was zero at the beginning of the statement period. Also note, that the interest rate on cash withdrawals is typically at a higher rate than interest on merchandise purchases.

Avoid using credit card “convenience checks”
Many Credit Card Companies like to send out blank “checks” along with their monthly statements or sometimes just as a special promotion. They indicate that you can make purchases with these just like regular checks. However, unlike regular checks from your Checking Account, you will be charged a fee for each “convenience check” you write (minimum fees could be $5.00 or more), and interest will immediately start accruing against the amount of the “check” (even if your initial credit card balance was zero at the beginning of the statement period. In other words, the use of such a “check” is very similar to using your credit card for an actual cash withdrawal from an ATM. The best thing to do with these “checks” is to tear them up (don’t just throw them away as is).

If you are getting these convenience checks from your credit card company, I recommend that you in fact request that they stop sending them out. You can call the customer service number and ask that all convenience check mailings be discontinued. Also if offered, ask that a confirmation letter be sent to you. Not only are using these checks a bad idea; they are also prime targets for identity thieves! If such a letter were stolen out of your mailbox you probably wouldn’t even miss it until the fraudulent bills started to show up on your credit card billing statement. Most companies will comply with your request for canceling such checks. If yours won’t, I recommend that you start shopping for a new credit card company.

Over limit cards
You can usually exceed your card limit without getting a red flag from disapproved purchases. Often, the credit card company will not prevent you from exceeding the limit i.e. alerting the merchant not to accept your card for a given purchase. You need to get this card back below the limit as a priority since you will be subject to the “over the limit fee” on your next card statement (even if you pay the entire amount off). The card’s monthly interest rate may also be increased. Remember, it is your responsibility not to exceed your card limit. These card limits should be kept in mind whenever you make large dollar purchases, but these limits should typically be set much higher that you should normally use. If you feel that your limit is too low (e.g. $500), then contact your credit card company. If you have a good payment record, they will probably agree to raise your limit. While you never want to exceed your limit thus incurring a penalty charge on your next statement, the governing factor on card spending is that the corresponding Budget Ledger(s) has sufficient funds within to take care of each charge amount.

Stay tuned for part two

Thursday, June 22, 2006

More Credit Card Offers

New Card balance transfer offers
You may come across new credit card offers that also include balance transfers at an introductory very low interest rate or perhaps even a zero interest rate for a limited timeframe (one year is typical). The same caution as illustrated above applies here. Your payments will be applied to this transfer balances and not to your new purchases. Hence you may not be saving anything or possibly even be loosing money! Note, in these offers, the reduced interest is usually for only a limited duration and not “until paid off” as above. This makes the possible savings even more tenuous.

A variation of this type of offer is “0% APR for life”! That is, the life of the amount involved in the balance transfer transaction. This really seems too good to be true. A typical version of this type of offer requires you to make one or more purchases or cash transactions per month beginning at some point in the future. Well, doing this would put you in the same situation described earlier in having all payments applied to the amount initially transferred and your monthly purchases just building up compound interest charges! Hence this type of offer is indeed too good to be true and should be passed up.

Zero Percent APR on all purchases for one or more months
Here is a subtler “trap”. You may get information on one of your current credit cards indicating that all purchases made in a given month (or maybe several consecutive months) will receive zero percent (or a very low finance rate) for perhaps six months or so. In this type of “offer”, you are automatically “in” whether you want to be or not.

Example: For credit card “XYZ” you will have zero percent interest for six months on all purchases made in the up coming month. You then proceed to get that $3,000 big screen television you’ve been eyeballing for the last eight months! All seems well, but when you make subsequent purchases the following month on your “XYZ” card, you get hit with a big interest charge, even though you paid the entire amount for that months charges along with say $500 toward your big screen TV. Hmmm… it’s the same game as with balance transfers as described above. All of your payment will get applied to your big purchase made the month before with subsequence balances being subject to the normal interest rate.

As you can see in the above example, this is just a roundabout way at hitting you with a high interest charge on subsequent normal purchases. Although you are subject to this “offer” whether you want to be or not, it will only negatively impact you with unexpected finance charges if you choose to make some large purchase that you don’t plan to pay off until several months into the future. If you stick to your normal use of the associated credit card making only purchases that you plan to pay off in full on the next statement, you will not be subject to any finance charges and thus will receive no negative impact from the offer.

Payment holiday…
You may get an offer from a credit card company to skip a payment! This often comes around after the Christmas holidays. While this may appear to be a welcome respite, remember that finance charges will still accrue on the outstanding balance during your “free” month.

Some credit card companies are offering this “payment holiday” any time you pay more than the minimum due in a given month. For example: minimum due is $25.00, you pay $100.00. You may get a payment holiday offer the very next month. Your best bet is to ignore these “holidays” and continue to make normal payments. While your payment should always be at least the minimum due, you are hopefully paying considerably more on a month-in-month-out basis. You can defer your “holiday celebration” until after you’ve paid off the outstanding balance in full.

No Late Fees
Some credit card companies are starting to offer cards that don’t have any late fees! Hmmm, let’s embark on a search into the fine print jungle and see what we can discover. The first discovery will probably be a requirement that you make at least one additional purchase on the card during the billing period. A caution will typically also be included warning you that your interest rate may go up and a negative mark entered on your credit report is also possible. Hence we have the same problems from the Payment Holiday topic above at even higher interest rates! Our credit report may take a hit also. Hence I recommend passing these offers by. If one of your existing cards extends this offer, just pretend it isn’t there and continue to make timely payments month after month after month.

More Credit Card related stuff to come…

Wednesday, June 21, 2006

Balance Transfer Special Offers

Until Paid in Full … hmmm …
You may receive special balance transfer type checks from your credit card company. Unlike normal credit card checks, these come with an extremely low interest rate good until the associated balance is paid in full! Also, the check usage/balance transfer fees may be reduced or waived altogether. An example rate is 2.99%, which is lower than you can probably get on a home equity loan!

You say to your self: “There must be a catch… isn’t there?” Well, yes, there are in fact several catches. First there is the normal catch, that you must be eligible for such a rate, and a subsequent credit check may bounce your rate up high. You can head off this potential problem by contacting the company ahead of time via phone. They should be able to confirm whether or not you are currently eligible for the offer. Second, if you ever default on your card per the card agreement, all of your special rates may evaporate.

The biggest problem, however, is the issue of how subsequent payments are applied to your outstanding balance. A typical clause regarding distribution of your payments is as follows: “We will allocate your payments and credits to pay off balances at low periodic rates before paying off balances at higher periodic rates.” Hence all of your normal payments will be applied to the special purchase or balance transfer, until it is paid off.

For example, let us say that you use one of your special credit card checks to pay off a home equity loan balance of $5,000. You also use the card for normal day-to-day expenses and average about $500 per month on such uses. Per my budgeting guidelines, you pay off this balance on a monthly basis. However, for the home equity loan payout you plan to take two to three years to pay it off considering the low interest rate of say 2.99% as offered. The statement received after the first month could be as follows:

· Statement charges: $500.00 for various purchases.
· Special Check used for Home Equity Loan balance: $5000.00 say with 15 days left in your billing period. Hence a finance charge of $6.14 to cover these remaining days will be added on even if your previous balance was paid in full.
· Let’s say you plan on paying $200 on the Home Equity Loan balance per month until the balance is paid. You also are going to pay your $500 in normal expenditures in full. Then your payment would be $700 in total. However, your payment will all be applied to the transfer-balance because it has the lowest APR!

Consider that your normal APR is 12.99%, and you put another $550 in normal expenses on your credit card the next month. Then the following will happen on the next statement:

· Your payment of $700 from the previous statement will be applied all to your Home Equity Loan balance reducing it to $4306.14 (remember that it already had $6.14 in finance charges applied). Next months finance charge (2.99%) would apply for the entire month (30 days) and would be $10.58.
· Your normal expenses balance of $500 would still be outstanding for the whole month and incur a finance charge (at 12.99%) of $5.34.
· Your new charges of $550 say have an average duration of 15 days and would be subject to an immediate finance charge since this is no longer a zero-balance credit card. The finance charge would be $2.94.
· Your total statement balance for the second month would then be:
o Special-transfer remaining balance: $4306.14
o Special-transfer balance new month interest: $10.58
o Prior month expenses: $500.00
o Current interest for prior month expenses: $5.34
o Current month expenses: $550.00
o Current month interest: $2.94
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Total Transfer/expenses: $5356.14
Total current finance charges:$ 18.86
Total Balance: $5375.00

The above balance includes $18.86 in finance charges. If you had not used the check to pay off the Home Equity Loan balance, then you would have had no finance charges on your credit card since you pay it off each month. Let’s say that your Home Equity Line has a current rate of 4.00%; then you would have paid $16.44 interest on your $5,000 balance. Hence, even though the special balance transfer of 2.99% is significantly lower than the Home Equity Line rate of 4.00%, its use would actually cost your more in finance charges ($18.86 on the credit card vs. $16.44 on the Home Equity Line). Plus the finance charges on the credit card are not tax deductible. This situation is caused by mixing normal card expenses with the special balance transfer amount.

The only way to use this type of offer effectively would be to isolate the associated credit card to only the special checks i.e. not to use the credit card for any other purpose. In this way, only the balance associated with the special check(s) would be involved and thus only the special low interest rate. If you only have this one credit card and need to continue using it for normal expenditures, then you should simply tear up these special checks and not transfer any balances.

Note, even if you can make good use of the offer, you may not qualify! The company may conduct a special credit review once you attempt to use one of the checks. If you have developed some issues with one of your other creditors then you may be disqualified. The disqualification would mean that you would be subject to the standard rate for the given transfers instead of the promo
tional rate! Such an event could put you in a worst situation i.e. paying a higher interest rate plus the added transfer fees.

Also note: even under the best of circumstances, if you transfer balances including items that you have not received yet or are in the process of attempting to settle some type of dispute, you may forfeit your rights after the balances have been transferred.

Still more to come regarding credit card offers ...

Tuesday, June 20, 2006

Special Rebate Offers

Some credit card promotions include a special rebate on purchases. Such offers could be for 5% or more. However, it is important again to seek out and read the fine print. First make sure that the offer is for a cash rebate and not just some type of credit or points or miles, etc. Good ole fashion cash on the barrelhead so to speak is always best. Also there is most likely some type of limit on the amount of rebate cash you can get – a typical maximum is three hundred dollars in a given calendar year. Speaking of limits, check on how long the promotional period is and if you need to maintain some type of card balance to qualify. If you are seriously considering this type of card, then a requirement to maintain any kind of balance would almost certainly negate any advantage of obtaining cash rebates. This type of offer only makes sense for a card that you will maintain at zero balance.

While looking at especially high rebates such as 5%, 6% or even more, check for the duration of such rebates. They may only be for one or a couple of billing cycles. The “normal” rebate percentage may be much lower. It may turn out that a given card is no better than those you already have and thus there may be no real need to just acquire an additional credit card.

If you picked up a brochure at a place of business regarding a special credit card offer be sure to check for any applicable expiration dates. Unlike an offer that you receive in the mail or see in a daily newspaper, you don’t know how long these brochures have been lying around. While some of the offered incentives may still be in effect, others may not. It’s up to you to verify the current validity of such an offer.

Stay tunned for more credit card promotion info...

Monday, June 19, 2006

Welcome to my first Blog ever. I am currently developing a book Basic Budgeting Concepts (copy write 2006) and want to use this blog to post various topics that will appear in my book. My first topic to be explored here will be a discussion of credit card promotions. Some of these promos are for new cards, while others are for cards you currently have.

Credit Card Promotions
You undoubtedly get promotion material for new credit cards every month. First, I recommend that you in fact open each one and review the offer. Who knows, there may be something that really catches your financial eye. Also, these offers typically include your name and some type of “coded information”. I recommend that you shred or at least tear up any page that has your name on it before tossing the material in the trash or recycle bin. As detailed below, these promotions generally fall in to two categories: pre-approval and special rebates.

“You Are Pre-approved!”
You may receive promotions in the mail indicating that you are pre-approved for some type of credit card with a very low (could be zero) finance charge for a number of months. It also typically indicates that you are pre-approved for a limit up to some high dollar amount. In reality, this type of promotion doesn’t mean that you can get the card indicated or what your actual limit would be! A review of the fine print often leads to the fact that, you may only qualify of a lesser card (e.g. “silver” instead of “platinum”) which carries a higher finance charge for both the promotional and long term periods. Also your actual card limit may turn out to be much lower than the up to dollar amount quoted. If you were not currently looking for a new credit card, you should pass these offers by without a second thought. If you are in fact looking for a new card, read the offer over very closely before accepting it. Then, once you receive the actual card, check to see if it is the same type (e.g. “platinum exclusive”) that was in the promotion and if not, check the terms of the card actually received to determine if it is worthwhile keeping.

Stay tunned for additional Credit Card Promotion infomation