Losing The Ghost of Credit Past
Elizabeth Coit - Executive Director, Networks Financial Institute at Indiana State University
Categories: Family, Financial, Personal Finance
Although the holidays are behind us, many Americans continue to be haunted with credit card debt well beyond the New Year. A Consumer Reports magazine poll found that 23 percent of those surveyed say they will not pay off their holiday debt until March or later.
Although the holidays are behind us, many Americans continue to be haunted with credit card debt well beyond the New Year. A Consumer Reports magazine poll found that 23 percent of those surveyed say they will not pay off their holiday debt until March or later.
According to the National Retail Federation, the average U.S. consumer spent around $800 in holiday shopping for 2006, up 7 percent from 2005. Experts attribute the increase to falling gas prices, a robust economy and increased emotional attachment to the holiday season.
When it comes to paying for holiday spending, more than one-quarter of Americans cited credit cards as the most-often used form of payment, contributing to the $63.6 billion charged throughout the holiday shopping season. When used unwisely, the $800 holiday expenditure, can become much more. Making the minimum payment (based on 2.5% of the balance) will require 10 years and 10 months to pay off, and result in interest of $815.49, or a total payment of $1,615.49! Suddenly, it’s easy to understand how average credit card debt in the U.S. has risen to nearly $8,000 per person.
Credit cards are not inherently bad methods of payment. They offer convenience as well as an opportunity to establish and build credit. The key to using credit cards wisely is to become educated about how to use them.
Credit cards are not a courtesy extended to cardholders by banks. They are a significant profit center for the issuing institution. Credit card issuers charge interest fees on cardholders’ balances that represent 75 percent of card companies’ income. The interest rate is generally referred to as an annual percent rate (APR); an amount often determined by the applicant’s credit score (the higher the score, the lower the APR).
APRs are either fixed or variable. Variable rates are subject to change at any time without notice from the card company; changes to fixed rates require notice. It’s generally best to find a card that has a reasonable, fixed interest rate. Cardholders should be wary of variable rates that are initially low – they often skyrocket shortly after the card is issued. According to billsaver.com, the average credit card APR is 13.37 percent, and most cards charge between 5 and 21 percent. Department store cards tend to have a higher APR, around 18 to 21 percent.
Beyond interest rates, cardholders should read the fine print regarding annual fees. In today’s competitive credit arena, finding a card without an annual fee is relatively easy. Cardholders also need to familiarize themselves with miscellaneous fees such as “over the limit” and “late payment” fees; these can often amount to $20 or $25 per billing cycle.
Once a card is issued, credit cards can be used to build a strong payment history. For first-time cardholders or those who need to repair their credit, a secured card may be the best option. A secured card is a credit card that is backed up by funds in a designated account. If the bill is not paid, the account can be used to pay the balance. Thus, the credit line is tied to the funds available in the account.
Most cardholders carry too many cards. One credit card is generally sufficient. Limiting credit cards can protect the cardholder’s financial integrity by reducing the consequences of identity theft and also ensure financial responsibility by limiting the amount a consumer may be tempted to borrow.
When selecting a card, applicants should consider the features of the card as well as the APR. Some questions to ask when selecting a card include:
• How long is the grace period (the time between purchase and date payment is due)?
• How is the finance charge calculated? Is the outstanding balance calculated over one billing cycle or two? Is it based on the average daily balance or the previous balance? Does the balance include or exclude new purchases?
• Does the card offer incentives or special features? These may include frequent flier miles, phone call minutes, additional warranty coverage and car rental insurance among others.
• Does the card allow balances to be transferred from higher rate cards? If so, will the transferred balances continue to receive the lower interest rate?
• Does the card provide online account access, making it easy to track balances and make payments?
Cardholders need to be wary of purchasing unnecessary stolen card protection. Federal law already protects cardholders in the event their information is stolen.
There are a number of resources that can help consumers choose the credit card that is best for them. An excellent site is the Federal Reserve Board. This very thorough online resource is located at www.federalreserve.gov/Pubs/shop.
Finally, there is some good news with regard to consumers’ use of credit. Experian National Source Index, one of the largest credit reporting services, says that credit card use has declined nearly 20 percent over the past five years. This movement toward “pay-it-now” purchasing is a positive one for Americans’ financial health. It provides a sense of optimism that the ghost of Christmas 2006 may not extend to the 2007 holiday shopping season.
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