Credit Cards "Dream Or Nightmare"

Tue, 16 Dec 2003 Source: Panford, Kwamina Mbra

There is an Akan (Ghana) wise-saying, “The one who has been bitten by a snake is afraid of the worm. There are so many people who have been burned by credit cards to the extent that the mention of them gives them jitters. If your credit is ruined, you may stop reading it or prepare not to repeat your mistakes when you get back on your feet. If your credit is still good you may pick up a pointer or two.

The use of credit cards is the biggest factor that fuels the American economy. Credit cards have sustained the purchasing power of the consumer thus buttressing the developed world’s economy. The financial institutions live on them and so they do every thing possible to push them on the consumer. A financial institution is not doing you any favor giving you a credit card. However, if you are a William Buffert, a Bill Gates, or a Rockefeller (for the old timers), you do not need a credit card. To the average Joe, a credit card is not a need but a tremendous asset. The bottom line is how you use it.

One must develop a good credit history to have financial clout. 99% of the time if one goes to the bank to obtain for example, a $10,000 loan, one is going home empty-handed. Invariably, one easily gets a $10,000 credit line on your credit card without meeting a bank representative, (if you have maintained a good credit history). This is easier than most people think.

First it must be understood that a credit card is just that. It is not money you have. It is access to money you can use prudently to help yourself. Don’t run around with your credit card and spend as you wish. It is like being in high current water. You can drown in it or use it to get ashore. Credit cards are for unforeseen or planned expenditures. You can afford to pay wholly or by installments. Don’t listen to American Express’ “don’t leave home without it”. Leave home without it except when you plan to use it or keep one on you for emergencies. This is the first step to financial discipline. Don’t use credit cards for grocery and fuel for your vehicle. One loses control of one’s financial discipline.

After one charges, one must learn to pay the bills. If you are paid bi-weekly you divide you household bills and credit charges into two. Did you know you can re-schedule you payment due date? If a credit card bill clogs your payment schedule, call your bank and re-schedule the due date. Then pay your bills on time. If you have Internet, try and pay your bills on-line. Most on-line banking is done electronically. This decreases your chance of late payments. If your payment due date is on the 12th and you pay on-line by the 10th, your bank receives your payment at most within 2 business days. If you need help with on-line banking, see your bank representative. Believe me, once you start on-line banking, you’ll wonder why it took you so long!

When paying a credit card bills, first allocate money to pay the minimum on all of them. Use whatever is left to attack those with the highest interest rates. For example, a) Bank America - you owe $10,000 at 10% and b) Citibank Card you owe $5,000 at 6%, pay minimum due on the $5,000 and maximize your payment on the $10,000. You eliminate your debts faster because you are attacking the higher interest rate first. The amount you owe goes down faster.

When using a credit card, avoid using the one with a promotional rate. Otherwise any payment you make, will be applied to the promotional rate, which is definitely lower than the non-promotional rate. (Refer to the previous concept). This leaves you with the higher rate, swelling your debt. Keep in mind that if you are a good paying customer, after 6 months of regular monthly payments, you can negotiate your interest rate down. Don’t be afraid to apply for credit cards offering promotional rates and balance transfers. Just make sure they do not have annual fees or hidden and exorbitant charges.

Keeping a good credit rating means: (a) Paying on time (b) Paying at least the minimum due. (c) Not going over your credit limit. (d) Paying with your bank checks or on-line (this means you have to open a checking account). Checks don’t bite. Stop buying those money or postal orders.

Don’t take a casual attitude towards the above because they come back to dig holes in your wallet. Why should somebody pay 5% on a $10,000 loan ($500 per annum) while you pay 20% or $2,000 per annum for the same $10,000! A customer is rewarded or punished for financial self-discipline or lack of it. All interest rates on personal, mortgage, equity, auto loans and what hove you, are based on your credit history.

After you have managed to keep a good credit standing you can protect your credit rating by making sure no financial institution puts any bad report on your record. You can get a credit report through Equifax, TRW, Experian or Transunion. You have to pay for it. Or, if you are denied a loan or credit line, you are entitled to a free credit report. Make sure all inaccurate entries on your report are removed. You can write or call the guilty institution.

Getting a good credit rating has great benefits. The interest rate you pay is highly related to your credit rating. First, don’t obtain a credit card with annual fees. With good credit, you can get it waived. Make sure your credit card has a 30-day grace period. Some credit cards charge interest immediately after your charge is posted to your account. A grace period allows you to pay your bill without interest charge if you zero your balance before the next billing cycle.

The latest craze is the balance transfer and or transfer checks. This is a pure reward for keeping a good credit history. You owe $5,000 at 14.9% and you just throw into the garbage can an offer of 5% for one year? At 14.9% you pay approximately $750 for the year. You save $500 if you transfer to the bank offering 5%. Don’t be scared by the time that 1-year promotional rate expires, you would have been offered another one. Just make sure you don’t skip payment and go ever the limit. The balance transfer is a carrot and stick strategy by the bank. If you are smart, you chew the carrot only. Watch out for the transfer fees called transaction fees. Some banks charge up to 5% of the transferred balance. Some put a cap on the fees. The statement will run like this: 3% of transferred balance, maximum $35. This is a better deal! If there is not cap on the amount, stay away unless you are desperate.

As a reminder, if you have a good credit history, you can get a once per year courtesy waiver of late payment fees. This waiver of the fees not only saves you the fees but also, it keeps your credit status intact. Most of the reputable banks have a one time annual courtesy waiver of a late payment and you have to take advantage of it when you miss a payment.

Views expressed by the author(s) do not necessarily reflect those of GhanaHomePage.
Columnist: Panford, Kwamina Mbra