Navigating the Costs of Credit Cards
Borrowing money to purchase items, no matter how much or how often, can be expensive. Whenever possible, it's best to use cash for purchases. That doesn't mean you should never use credit – there are plenty of benefits to doing so. However, you should take a few simple steps to ensure you're using it wisely to reduce the costs you'll pay. It helps to know all the costs of using credit.
What Are You Paying to Borrow?
Do you know how much interest you are paying on your credit cards? You can find out by looking at a statement from each of your lenders. Take a look and you'll find an annual percentage rate, or APR, listed. That's the largest cost of borrowing. It is the rate charged to you as an annual rate for borrowing.
For example, if you have an APR of 25%, and you borrow $100 for a year, you'll pay $125 back to the lender. That's $25 for the $100 borrowed. This is often less, as you'll likely pay a portion of that $100 off before the year elapses.
But, there are additional fees associated with many credit cards. It's important for you to know what those fees are and what they represent.
Annual Fees are a common charge on many credit cards. They are flat fee that used to range from $25 up to $100 or more. Nowadays many rewards cards are charging annual fees over $500! These fees often go unnoticed because most credit cards will waive the fee the first year. However, they will be a not so fun surprise the subsequent year!
Late Payment Fees are flat fees charged to your account if you miss a payment. Though some lenders give you a bit of leeway before applying the fee, they can do so if you are late even one day.
Cash Advance Fees occur if you use your credit card at an ATM to take out cash or send someone else cash from your credit card. Cash advances also typically carry a higher annual percentage rate (APR) than normal purchases. It is advised you only use a cash advance in an emergency.
Balance Transfer Fees occur when you transfer the balance of one credit card to another one. While some lenders will offer you 0% APR on transferred balances for a set period, there is usually still a balance transfer fee charged. These fees are usually a percentage of the balance transferred, for example, between 3% and 5%. So if you transfer a $5,000 balance to another credit card, the fee would be between $150 and $250.
Foreign Transaction Fees occur when you make purchases on your credit card overseas, such as while traveling.
Choosing the Right Credit Card
Between high interest rates, fees and low minimum payments, credit cards are one of the leading causes of financial problems for people today. However, that’s not to say that credit cards should be completely avoided.
If used responsibly, credit cards can help you cover emergency expenses and even improve your credit score. One of the easiest ways to avoid many of these pitfalls is to get a credit card from an institution you trust.
Credit cards advertised with too-good-to-be-true rewards or store cards offering discounts at the register are often plagued with high-interest rates and annual fees. Offers in the mail with 0% APR balance transfers often contain pages of fine print even the most savvy money experts have difficulty understanding.
Credit cards are not a game; no matter how hard commercials promoting high-rewards make them seem to be. Be responsible, choose a credit card from an institution you trust and always strive to pay off your full balance owed each month.
Manatee Community Federal Credit Union is Here to Help.
Each individual’s financial situation is unique and readers can talk with a credit union representative at 941-748-7704 ext. 125 when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.
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