When You Use Credit

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Money and Marriage
Issue 6. When You Use Credit

$ Shop for Credit • $ Five Credit Card Tips • $ Credit IQ Quick Quiz

In 5, Before You Use Credit, you learned that using credit has advantages and disadvantages. This article focuses on the cost of credit and how to shop for credit to receive the most value for your money.

$ Shop For Credit

Questions for Sue. Starting a new job? Need to spruce up your wardrobe?

Let's say you spent $1,000 on clothing using a credit card charging 18% interest and made the minimum payments• to pay off the balance. It would take you almost 6 ½ years to erase the debt and your $1,000 wardrobe would actually cost you more that $1,650.

Using a credit card charging 12% interest, the wardrobe would cost you $1,335 – a savings of more that $300 in interest charges.

Questions for Ron and Roberta. Moving to a new home? Need more furniture?

If you buy $2,000 worth of furnishings with a credit card charging 18.5% interest and pay off the balance by making the minimum payments•, it will take you more that 11 years to repay the debt. By the time the load is paid off, you will have spent an extra $1,934 in interest alone – almost the actual cost of the furniture.

Minimum payment is based on 1/36 of the outstanding balance or $20 – whichever is larger.

$ Five Credit Card Tips

Credit Card Tip 1

When is the Minimum the Maximum?

If you pay the minimum monthly payment toward your monthly credit card bill, you are paying the maximum interest. In fact, when interest is compounded, you could end up paying interest on your interest!

The minimum payment might be convenient if it's all you can afford. But whenever possible, pay as much as you can. If you have an 18.5% interest rate card, it will take you more that 11 years to pay off a debt of $2,000 if you only pay the minimum balance due each month. During this time, you will pay interest charges of $1,934, almost doubling the cost of your purchase. This calculation is based on making a payment which is 1/36th of the outstanding balance or $20, whichever is greater.

Credit Card Tip 2

Beware of skip-a-month payment offers. Remember, you still pay interest on your outstanding debt, and your total interest costs continue to rise.

Credit Card Tip 3

While cash advances look attractive, keep in mind that interest usually accrues from the moment you accept the cash. If you add in transaction fees, the annualized interest on cash advances can be more expensive than you first thought.

Credit Card Tip 4

Be prepared for credit card theft. Keep a list of your credit card numbers in a secure place. The list should include the name and phone number of each card issuer. Report lost or stolen cards immediately. If you report the loss before a thief uses the card, you cannot be held liable for any purchases made with the card. If a thief uses a card before you report it missing, the most you will owe on each card is $50. You can use the handy form in Credit Cards and Charge Account Register.

Credit Card Tip 5

What is a Grace Period? (Choose your answer)

A. The "free period" when you don't have to pay interest on your credit card debt.

B. The time between when you receive your credit card bill and when you have to pay it.

C. The amount of time, usually 20-25 days, during which you don't have to pay interest on purchase made with a credit card, IF AND ONLY IF you have no outstanding balance on your card.

Correct Answer: For most cards, C. Credit cards usually offer consumers a grace period. But many consumers don't realize that if you owe anything at all from a previous bill, you start paying interest from the moment you make a purchase.

If you were wrong, don't be embarrassed. Eight out of ten consumers surveyed who knew they had a grace period didn't know how it worked.

$ Credit IQ Quick Quiz

The percent of your take-home pay used for credit payments should not exceed:

a. 5%

b. 10%

c. 20%

d. 25%

A bank may refuse to offer you credit based on:

a. age

b. income and credit history (credit report)

c. number of dependent children

d. marital status

The best indicator of the cost of a loan is the:

a. number of monthly payments

b. monthly payment amount

c. interest rate

d. loan amount

When shopping for credit cards, evaluate:

a. fees

b. the way interest is compounded

c. interest rates

d. all of the above

A grace period is important because it:

a. allows you to skip one of your monthly payments

b. gives you a period of time during which to pay off your bill without incurring interest charges.

c. allows you to charge over your approved line of credit for a month

d. requires you to pay off your balances over a set period of time

The Equal Credit Opportunity Act states that:

a. consumers are protected from illegal discrimination based on race, color, religion, national origin, sex, marital status or age

b. a creditor cannot ask you to reapply, close your account or change terms of a loan if you become widowed or divorced.

c. a creditor cannot turn you down for credit if your income comes from pensions, annuities or part-time income.

d. all of the above.

To keep credit card interest payments as low as possible:

a. try to pay off your bills in full every month

b. take out a bank loan at a lower interest rate and use the money to pay off your credit card bills.

c. switch to a different credit card that has a lower interest rate

d. all of the above

If you carry a balance of $2,000 with a card that charges 18% interest, by making the minimum monthly payment of 3%, you will pay off the loan in:

a. three years

b. six years

c. nine years

d. twelve years

If you charge $50 every week on groceries for a year ($2,600 total) with a credit charging 18% interest, then repay the debt with minimum monthly payments, during the first year the interest on those groceries will cost you an additional:

a. $52.00

b. $ 104.50

c. $174.12

d. $223.63

10.

A person with credit problems should:

a. commit themselves not to increase the debt they already have.

b. analyze their spending habits and adjust them

c. contact a local consumer credit counseling service

d. all of the above

Answers:

1. C

2. B

3. C

4. D

5. B

6. D

7. D

8. D

9. D

10. D

Scoring:

9-10 correct: Congratulations! You are credit-wise.

5-8 correct: Careful! You might be spending more money than is necessary. Learn your credit card's interest rate and fee schedule. Examine your cardholder agreements to find out the terms and conditions of your card. With a little knowledge, you can shop around and use a card that's right for you.

0-4 correct: Caution! You might want to call a local consumer group, credit counseling service or government office of consumer affairs for more information about the use of credit cards.

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Money and Marriage Issue 6. When You Use Credit

Money and Marriage
Issue 6. When You Use Credit