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Those Pieces of Plastic can be a Great Convenience - As Long As You Don't let Them get the Best of You

"Acquisition Ecstasy" is what Adam K Levin calls it - the feeling that comes over you at the Big-Box Store when you're in front of that 50-inch Plasma TV and you know you could bring it home today with just a swipe of your credit card.

"You hand it to someone, they give you something you really want and you don't have to think about it for 20 to 30 days," Levin says. "It's almost as if your endorphins take over. And then, unfortunately, the reality sets in."

Levin is president of the consumer website credit.com and the former director of the New Jersey Division of Consumer Affairs. He says that acquisition ecstasy is just one of the pitfalls that can trip up even the most well-intentioned credit card user. Making sure you don't fall prey to any of them starts with choosing a card that's right for you.

Pick a Card, Any Card

"I've seen estimates that there are as many as 40,000 card offers out there," says Curtis Arnold, author of the forthcoming book, Profiting from Credit Cards. Don't assume that the offers you get in the mail are the best one out there. It's also a good idea to call your present card issuers and ask about current deals. "The customer service rep may have access to offers that aren't advertised in other channels," Arnold says.

To start, know the type of card user you are. If you're planning to carry a balance month to month, focus on the interest, expressed as an annual percentage rate (APR). If you expect to pay off your balance each month, look at rewards programs such as cash-back rebates and airline miles. Just make sure that the rewards you're likely to earn will be worth more than the card's annual fee.

Also pay attention to the card's fees for paying late and exceeding your credit limit, as well as its grace period on new purchases - the window during which interest isn't charged. If your card has a 20-day grace period and you pay your balance in full, you may pay no interest at all.

“Don't assume the offers you get in the mail are the best ones out there”

The Fine Print

Under the Federal Truth in Lending Act, card issuers are required to tell you the terms of your initial agreement and to notify you whenever those terms change. But the documents they send out to do that aren't always easy reading. "We get those things in the mail from our credit cards that say that something has changed, and that's followed by 10,000 words of fine print. It's very difficult," says Greg Daugherty, editor at large at Consumer Reports Magazine.

To simplify things, first look at the "Schumer Box" for any card offer you're considering (it's named after the New York senator who drafted the bill that mandated card disclosures and will appear prominently on the documentation you receive). It summarizes everything from the APR and minimum finance charges to annual fees and grace periods.

Look specifically at how your APR is calculated for new purchases. Although many cards have a fixed rate than can change only with prior written notice, others have variable or tiered rates. A variable rate may be linked to an index, such as the prim rate. Cards with tiered rates may charge one APR for low card balances (under $500, for example) and higher rates for balances above that amount.

Then drill down further, paying special attention to the following potential terms:

Universal Default - If your card includes this provision, it means that the issuer can raise your interest rate if you're late on any bill that you regularly pay - such as your monthly utility bill. Your credit card rate can go up for reasons that have nothing to do with your payment history on that particular card.

 

Double-Cycle Interest - This provision states that, even though you may be paying your balance in full, in order to avoid an interest charge, you need to have paid the previous month's balance in full as well.

 

"Fixed" Rates - Although you may have been promised a fixed rate, look closer. Sometimes agreements specify that your rate can change at any time with a 15-day written notice.

Cash-Advance Fees - For the convenience of a credit card cash advance, you may be charged a flat fee and/or percentage of the amount you withdraw. In addition, interest may begin to accrue immediately and at a higher rate than that charged for regular purchases. If you get your cash advance at an ATM, there could be an additional fee. And if your card issuer sends you convenience credit card checks in the mail, be aware that they operate just like a cash advance.

 

Balance-Transfer Provisions - Even though your card issuer may promise a low rate on balance transfers from your other high-rate cards, all of your subsequent monthly payments could go entirely toward paying off that low-interest balance first. In other words, your existing balance and any new purchases that are charged at the card's regular interest rate aren't being paid down at all. If the transfer rate isn't fixed - a so-called "introductory" rate - try to pay off the transfer balance before the promotional period runs out; it's estimated that 53% of balance transfers don't, however.

 

Penalty Rates - According to credit.com, about 75% of card issuers reserve the right to raise your interest rate if you ever make a late payment on the card. Currently, the average penalty rate hovers at around 23%.

 

You're Still In Control

Consumer Reports has found that more than half of cardholders pay their bill late at least once a year, triggering a late fee. Many are due to a simple oversight.

In instances like these, Daugherty suggests asking for a reversal of the charge. "It's very much worth a phone call," he says. "Anecdotally, we hear that very often times. they will try to accommodate you to some extent. It's much cheaper for them to keep you than it is for them to send out all of that direct mail and try to get someone to replace you as a customer."

And don't stop there. If you have a long history with a particular card, it never hurts to ask for a lower interest rate or even a change in your billing cycle that would give you a more convenient monthly payment date. "People need to understand that they really have power," Levin says.

In the end, it all comes down to choosing a card with the terms and provisions that work for you and then using it wisely. Do those two things, Arnold says, and you may be amazed at what a powerful - and empowering - financial tool your card can become. "Credit cards are not evil, even though they've gotten that reputation. Learn to use them responsibly - that's the key."

^Note: This communication is intended to provide general information about the subject matter covered or an idea that is discussed on this web site, with the understanding that HPHA is not rendering legal, accounting, or tax advice. Your should consult appropriate counsel or other advisors on all matters pertaining to legal, tax, and accounting obligations and requirements.