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Financial Health: Credit Cards


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Credit cards allow a consumer to make purchases even if they do not have cash at the time. Purchases are made on "credit" and need to be paid back to the financial lender. While the concept of "buy now, pay later" may be tempting, consumers should be aware of credit card policies. 


  • Annual fee: A charge paid once a year for the right to use a credit card.
  • Balance transfers: The switching, or transferring, of a remaining balance (either money or credit) in an account to another account, often held at another institution.
  • Fixed rate: A type of loan where the interest rate on the note remains the same through the term of the loan. Most credit cards do not offer fixed rates.
  • Grace period: The time past the deadline for an obligation during which a late penalty that would have been imposed is waived.
  • Introductory rate: A limited time offer that is usually low. Once the "teaser rate" expires the interest rate for the balance can jump dramatically.
  • Variable rate: A type of loan where the interest rate on the note fluctuates through the term of the loan.

Credit Card Overview

Advantages of Credit Cards

  • Convenient
  • Can help to build good credit if used properly
  • Can be useful in emergencies
  • Serves as a second warranty when purchasing items

Disadvantages of Credit Cards

  • Making only the minimum monthly payment
  • Tempts overspending
  • High interest rates and
  • Fees (hidden)

Tips to avoid credit card debt

  • Have only one or two credit cards
  • Do not use cash advances
  • Do not sign up for the special services and plans offered by the credit card issuer
  • If you are not going to pay your balance in full, pay more than the minimum monthly payment
  • Keep good records
  • Never use pay day loans, or a paycheck advance

Industry Practices and Negative Impacts

There are some common industry practices that can have a negative impact on consumer credit card holders. These include

  • low introductory rates. Often referred to as "teaser rates," low introductory rates may be an attractive option, but they only last for a limited time. When the "teaser rate" expires, the interest rate charged on the balance can jump dramatically.
  • companies automatically raising rates for late payments, defaulting, exceeding the credit limit, past credit/debt history, credit score, or at any time, for any reason, as long as they give 15 days notice.
  • complex timing calculations that can trigger higher rates. Credit institutions can and will increase or decrease rates as they please. Some factors can include seasons, holidays, or a drop in the stock market. If the bank sends a notice stating they are raising the credit card interest rate, call the customer service number and negotiate. If the rate is very high, consider not using the card anymore. If it is a longstanding account, keep it open because it is good for credit scores. Pay down the balance but do not make any new charges. New charges trigger the new, higher interest rate. If the account is relatively new, cancel it. Pay off the balance or transfer it to another card.

Balance and Repayment

Consequences of not paying credit card balances in full within the time specified by the billing statement:

  • A billing statement will be mailed or sent via e-mail. Billing cycles typically range from 29 days to 31 days, but can be shorter or longer depending on your credit card.
  • If there is a balance from the previous billing cycle, a finance charge will be applied. The finance charge is calculated using the annual percentage rate (APR).
  • The minimum payment listed on the billing statement MUST be made before the payment due date to be considered current.
  • If the payment is not made on time, a late fee is charged.
  • Untimely payments can lead to increased interest rate and a decreased credit score.

Repayment Plans

The charts below illustrate the length of time it will take to pay off various balance amounts if only the minimum monthly payment required under the agreement is paid. Click image to enlarge.

repayment plan chart

Debit Card Overdrafting

Americans paid $38 billion in overdraft fees last year, according to a February 2010 issue of Consumer Reports. However, a new Federal ruling could cut that sum. The new ruling makes banks ask customers for permission before charging overdrafts on debit and ATM card transactions. In other words, customers will now have to opt-in for overdraft protection. Some banks will charge between $30-$40 for each over draft transaction. To help protect against overdraft fees

  • know the account balance. Keep in mind that when viewing online statements, some transactions may not appear yet.
  • keep track of spending. Save receipts and use a bank ledger.

Annual Percentage Rate (APR)

The APR is the total interest rate charged over the course of a year on a loan, credit card, or mortgage. The APR indicates the specific cost for interest over the duration of a loan. If a credit card has a 19% APR, interest payments would be $19.00 for every $100.00 borrowed.

Finance Charges

APR is generally calculated on an average daily balance. This method used the average of the balance during the billing cycle and adds the daily balance which is then divided by the number of days in the billing cycle.

Opt-Out Program

The federal government offers an opt-out program to limit credit card solicitations. To "opt-out" means informing companies they are not allowed to use information for certain purposes or sell it to third-parties. This is a good option for individuals who do not want their personal information shared with other companies or who do not want to receive telemarketing calls or direct mail.

There are many ways to opt-out of credit card offers. These include

  • calling 1-888-5-OPTOUT (1-888-567-8688) to be removed from direct marketing lists. This can also be done by visiting OptOutPrescreen.com, the official consumer credit reporting industry opt-out website.
  • contacting individual credit bureaus by sending a request to the following addresses:
    • Equifax Inc., PO Box 740123, Atlanta, GA 30374
    • Experian, Attn: Consumer Services Dept., 901 West Bond, Lincoln, NE 68521
    • TransUnion Name Removal Option, PO Box 505, Woodlyn, PA 19094
  • stopping unsolicited telemarketing calls by registering telephone numbers at the National Do Not Call List or by calling toll-free 1-888-382-1222 (TTY 1-866-290-4236) from the telephone number you wish to register. Registration is free and will stop most, but not all, telemarketing calls.