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Getting a cash advance from a credit card is a bad idea. Most card issuers charge a hefty fee for a cash advance, usually in the neighborhood of 2 to 4 percent of the amount. Then, many charge more interest on cash advances than they do on purchases. And, on top of that, there’s usually no grace period—so the higher interest starts piling up right away. Also, your payments will be allocated to the lower-interest charges first, so the interest keeps building on the cash advance amount. |
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Some retail stores and direct mail companies will push hard for you to apply for what they call a "credit card" to buy their products. But be warned: These credit cards sometimes aren't. The January 2000 Mississippi federal court decision Willie and Emma Oliver v. Bank One, N.A. dealt with one such scheme. The Olivers bought a television home satellite system from a door-to-door salesman. The purchase was financed by the issuance of a "credit card" by Bank One in May 1995. Bank One furnished disclosures pursuant to the TILA, as though the credit transaction was an opened-end or revolving credit facility...what most people think of as a credit card. But there were some differences. The limit on the card was almost exactly the purchase price; and no business other than the satellite company would accept the card. The Olivers didn't like the satellite system and eventually stopped making payments on the card by which they'd bought it. As a result, Bank One posted a negative item on their credit report. The Olivers sued Bank One. |
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Credit card companies have to provide certain information in any offer that they make to you, under the federal Truth in Lending Act (TILA). You can find this information printed in what's known as the "Schumer box" (after the U.S. Senator from New York who drafted the bill), which is required under TILA. This box will appear on the back of the letter offering you credit, or on another sheet of paper enclosed in the same envelope. |
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To make matters a bit more complicated, different credit card issuers calculate finance charges in different ways. Some card companies give you a stretch during which no interest is charged for your new purchases; others start the finance charge meter running the minute you make a purchase. It all comes down to whether or not the company includes new purchases in your outstanding balance, which is the amount on which finance charges are computed. |
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If you pay your bill in full each month, on time, you can avoid being charged interest. The time during which you can enjoy the use of the issuer's money interest-free is known as the grace period. Most credit card issuers describe this in a rather complicated way. They say that the grace period extends for a certain number of days after your credit card statement date. (The statement date is the date on which the bill was prepared by the card issuer, not the date on which you receive it. You may receive it as long as two weeks after the statement date.) |
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Periodic Rate Because “APR” is the abbreviation for annual percentage rate, and because credit card issuers send out their bills monthly, they do not use the APR to calculate the finance charges you owe in a given billing cycle. Instead, they use what’s called the periodic rate. This is the APR divided by 12 (as in 12 months). So if your card has an APR of 12 percent, the periodic rate would be 1 percent. That explains why you’ll see periodic rate for new charges on your credit card bills, along with the APR for your outstanding balance. |
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Many people choose a credit card based on its advertised interest rate. (This rate is usually referred to as the annual percentage rate or "APR.") But the advertised rate is by no means everything you need to know to avoid an unpleasant surprise later. Actually, a credit card can come with several different interest rates. Before you apply for a card, you'll want to learn the rates it charges for: purchases; cash advances; and balance transfers. |
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Using a credit card is a simple form of borrowing. And anyone who borrows money should know a few things about himself or herself before signing any agreements. You need to consider your life-style and payment style. Are you an impulsive shopper? Are you a bargain hunter? Are you frugal? Spendy? Do you pay your bills on time? Are you not so organized? There are no right answers to any of these questions. |
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If you've got reasonably good credit, odds are you receive credit card offers in the mail all the time. Some of those offers may sound pretty tempting, too-with high credit limits and low interest rates. But before you fill out any application, you'll want to read the fine print-and shop around. Although the government regulates the interest rates and other financial aspects of credit cards, the marketplace is incredibly diverse. Some cards offer cash back or frequent-flier miles based on your spending-but penalize you steeply for making a late payment. Others are more generous with grace periods-but charge a lot if you spend over your credit limit. Some cards make it easy to get cash advances-but charge you a higher interest rate than on ordinary charges. As a smart consumer, you need weigh the pros and cons of each credit card you consider. And, before you do that, you need to know what the pros and cons are. |
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If you loaned your brother-in-law a thousand dollars, under the agreement that he would pay you back $50 a month for 20 months, you’d be upset if he didn’t pay you one month. You’d be really upset if he didn’t pay you for two months. In fact, it might cause all kinds of family disharmony. |
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