What’s In Your Wallet?

What’s In Your Wallet?

Almost everyone today associates this phrase with the Vikings in the current Capital One Advertisement.  The consumer today has to be extremely savvy about his or her dealings in today’s complex financial markets.  Capital One along with dozens of other credit card firms would love you to have their card in your wallet as it represents a potential for a lot of revenue.  Your credit rating has a direct impact on the interest rate that you will pay on your credit cards.  For an excellent credit rating, one with a value of 725 or higher, the rate is 12.51%; for a good credit rating, one with a value of 650 or higher, you can expect to pay 16.57%; for a fair credit score of 600 or higher, you may be paying in the area of 20.87%; and lastly, for a bad or no credit rating, hang on to your hat as the rate jumps to 34.26%.

The credit card companies were the ones that initially established the fees that plague consumers today: late fee, over the limit fee, the infamous “annual fee,” fees for balance transfers, and now the new foreign transactions fees.  So, being the great guys that they are, the credit card companies now advertize the elimination of these fees as part of the new “Credit Card” experience!  But the buyer had better beware.  Miss a payment and you could find your rate jumping into the stratosphere.  Just like the friendly insurance company that tells you how much you will save you annually over their competitors until you file a claim.

One of the greatest potential pitfalls for consumers is using a credit card to get a cash advance.  The interest rate for cash advances is often several points higher than the normal purchase interest rate.  Cash advance rates normally range from 20% to 25%.  Cash advances begin accruing interest immediately and, therefore, are not subject to a grace period.  Even paying your credit card balance off in full when your bill arrives, you will still be accessed a finance charge for any advances.  Consumers should also be aware that any credit card checks received in the mail are treated as cash advances.  Card issuers often tout such checks as an easy way to pay off the bill of your choice or to acquire some extra spending money.  While using a check may be convenient, it can be extremely costly.  In addition, many balance transfers are treated as a cash advance.

Remember the old saying that “there is no free lunch.”  It is true.  One of the main dangers of using a rewards credit card is the cost.  Rewards cards usually charge higher interest rates and annual fees than other credit cards in order to offset the cost of the rewards program.  These added costs can outweigh the program benefits.  Also, the terms for a rewards credit card may be less generous than they first appear.  Perks that seem dazzling on promotional material may actually be offset by restrictions buried in the fine print.

You can pre-qualify for a Capital One credit card in less than 60 seconds.  No wonder the average credit card balance these days is pushing $8,000 and the typical interest is about 18%.  An 18% interest rate on an $8,000 balance is $1,440 a year.  For folks who have a balance on their credit card, there are few deals more tantalizing than a 0% interest on a balance transfer.  For a period of time, the credit card company is lending you its money for free.  That can mean a big savings on interest charges for those with revolving balances.  The trick is to look for 0% on both balance transfers and purchases.  Some cards offer 0% on balance transfers but not on subsequent purchases.  In addition, they may require that you pay off the balance transfer amount first, leaving the new, higher interest rate charges buried underneath.  For example, if you transfer $10,000 to take advantage of a balance transfer offer, and then charge $100.00, your payments will go toward the $10,000 first, while the $100.00 is accumulating interest charges at the normal outrageously high interest rate!

Cash back credit cards are the hottest thing out right now.  These cards offer to reimburse a percentage of the money you spend on certain goods and services.  The catch is that the stores that adhere to these programs charge significantly higher prices than other stores.  And the program, as stated in the contract, only works when you purchase at these stores.  You may think that you are getting money back by purchasing there but you are actually overpaying for the products or services you purchase.

In today’s rough economy, it pays to eliminate credit debt as quickly as possible especially in light of the current bank and CD rates where APY rates can range from $0.01% up to a rocking $0.05%.  More and more people are coming to the realization that they have to live within their means to survive.  As Suze Orman recently said, “ In today’s tight job market, I don’t see too many bosses who look like they’re about to back up the armored truck and start handing out raises.”

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Written by
Donald Wittmer