Understand credit card fees so you can avoid paying them
Money Girl
248 MG How Do Credit Cards Really Work?
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I'll tell you what you need to know so you never allow a credit card to get the best of your personal finances. I'm sure you already know that a credit card is a financial product issued by banks and other financial institutions that allows you to make purchases, take cash advances, and transfer balances from other accounts. I'll tell you more about balance transfer cards in just a moment. When you're approved for a credit card, you're given a line of credit which is typically the maximum balance you can accumulate on the card. Many people use the terms credit card and charge card interchangeably, but they're not the same. A charge card requires you to pay off your balance in full each month. A credit card allows you to carry a balance indefinitely as long as you make the minimum monthly payments. Earning your degree online doesn't mean you have to go about it alone. At Capelli University, we're here to support you when you're ready. From enrollment counselors who get to know you and your goals, to academic coaches who can help you form a plan to stay on track. We care about your success and are dedicated to helping you pursue your goals. Going back to school is a big step, but having support at every step of your academic journey can make a big difference. Imagine your future differently at Capella.edu. AI might be the most important new computer technology ever. It's storming every industry and literally billions of dollars are being invested. So buckle up. The problem is that AI needs lots of speed and processing power. So how do you compete without cost spiraling out of control? It's time to upgrade to the next generation of the cloud, Oracle Cloud Infrastructure, or OCI. OCI is a single platform for your infrastructure, database, application development and AI needs. OCI has four to eight times the bandwidth of other clouds, offers one consistent price instead of variable regional pricing, and of course, nobody does data better than Oracle. So now you can train your AI models at twice the speed and less than half the cost of other clouds. If you want to do more and spend less like Uber, 8x8, and Databricks Mosaic, take a free test drive of OCI at oracle.com/advanced. That's oracle.com/advanced. Oracle.com/advanced. The money you owe on a credit card is subject to an annual percentage rate or APR that's called a finance charge. Each card company has different terms that vary depending on the type of card, your credit score, and the type of transaction you make using the card. For instance, you might be charged 11.99% for new purchases, 18.99% for balance transfers, and 26.99% for cash advances. If you don't realize that it's outrageously expensive to take a cash advance on a credit card, you could end up with a massive bill that you can't pay off. When you make more than the minimum payment, the card company generally has to use the excess to pay down your highest interest balances first. That means the money would go towards reducing your cash advance balance before it would reduce the balance for your regular purchases. If you carry a balance from month to month, your goal should always be to use a credit card with the lowest interest rate possible, so you rack up the least amount of interest on your outstanding debt. The good news is that you can avoid all credit card finance charges if you pay off your balance before the due date on your statement. Making charges that you pay off in full each month is the right way to use a credit card because you pay no interest and can accrue substantial rewards. By the way, one of the biggest myths about using a credit card is that you have to carry some amount of debt on one to build credit. That's definitely not true because when you make a credit card payment on time, whether it's a full payment or just a minimum payment, you receive a positive transaction on your credit report that really helps you build your credit score. I mentioned a special type of credit card that's called a balance transfer card. Balance transfer cards offer low or no interest during a promotional period if you pay down another account, like a credit card or an installment loan, and move all or a portion of your balance to the credit card account. A typical balance transfer promotion might last from 6 to 24 months after you make a transfer, and then the interest rate can increase dramatically. You still have to make a minimum payment during the promotional period each month, and each amount you transfer is subject to a one-time fee that typically ranges from 3 to 5%. Here's an example of a good way to use a balance transfer card. Let's say you got a car loan a few years ago with a high 17% interest rate because your credit score wasn't as good as it is today. Your monthly loan payment is $500, and you have about $8,000 left to pay on the car over the next 18 months. If you transfer your loan balance to a card that offers 0% interest for 18 months and charges a 3% transfer fee, you'll come out ahead. If you pay $440 per month to the card during the 18-month promotional period, you'd keep the car's original payoff schedule and save over $1,000 in interest. For more information, check out a previous podcast number 146 called "Should You Use a Balance Transfer Credit Card?" Also, use the online balance transfer calculators at smartbalancetransfers.com and bankrate.com to find out whether doing a balance transfer can save you money. Besides finance charges, there are other ways that credit cards make money. If you mess up and pay your bill late, you'll be charged a fee as high as $25. If you pay late more than once over a six-month period, the fee can go up. Additionally, once you're 60 days late paying your bill, a card company can hike your interest rate. Another fee to avoid is called an over-limit fee. If you authorize your card company to allow transactions that exceed your credit limit, they'll process the charges, but also penalize you as much as 29.99%. Otherwise, a transaction that would exceed your credit limit will be turned down. Many cards, especially those that offer cash back or travel rewards, charge an annual fee. If you utilize rewards that are worth more than the annual fee, it may be a worthwhile expense. Otherwise, opt for a card that doesn't charge one. When you use a credit card, it's really important to monitor the activity on your account. Always keep your credit card receipts so you can match them against your statement. If you find anything that's incorrect, contact the card company right away to resolve the issue. They can open an investigation with a merchant who charges you for something you want to dispute. Be sure you understand what interest rates you're paying for every credit account you own. Using credit responsibly includes taking the time to go over each statement with a microscope so you watch out for fraudulent charges, fees, or unexpected changes in your interest rate. Need some help with your new year's financial resolutions? Just grab a copy of my book, Money Girl Smart Moves to Grow Rich. It tells you what you need to know about money without bogging you down with what you don't. It's available as a paperback or e-book. When you visit smartmoves2growrich.com, you can download two free book chapters. Plus, my free credit score survival kit. Also, be sure to connect with me on Facebook. Just go to Facebook.com and do a search for Money Girl. My username on Twitter is @LaraAdams with no space. Also, if you're not already subscribed to the podcast in iTunes, that's how most people get the show. Subscribing is free and simply means you'll automatically get each new episode as soon as it's published on the web. I'm glad you're listening, to Ching. That's all for now. Courtesy of Money Girl, your guide to our richer life. Earning your degree online doesn't mean you have to go about it alone. At Capelli University, we're here to support you when you're ready. From enrollment counselors who get to know you and your goals, to academic coaches who can help you form a plan to stay on track. We care about your success and are dedicated to helping you pursue your goals. Going back to school is a big step, but having support at every step of your academic journey can make a big difference. Imagine your future differently at Capella.edu. [BLANK_AUDIO]