Cost of Credit Cards

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What Can Consumers Do To Reduce Credit Card Costs?

The average American household that pays credit card interest can save as much as $400 per year in credit card finance charges by paying off high interest credit card debt with assets they already possess. If just half of all outstanding credit card balances in the U.S. were paid off in this manner, the savings to FACSs would be more than $11.5 billion. (Source: Law and Economics Consulting Group.)

There are more than 6,000 issuers of credit cards, offering cards with a variety of interest rates, fees, and incentives. Visa and MasterCard are marketing associations; however, individual banks issue most credit cards and decide what interest rates and fees to charge. It pays to shop around. Compare credit cards and choose the one that’s right for you.

I just got a new credit card that was supposed to come with a 25-day grace period during which I pay no interest on purchases. I sent in my minimum payment the first month, and the second month my grace period disappeared. What happened?

Read your cardholder agreement carefully. Most cards offer a grace period of 20-25 days during which you pay no interest on the purchases you make. But in most cases, the grace period applies ONLY IF you have no outstanding balance on your card. If you want to take advantage of the interest-free period on your card, you must pay your bill in full every month.

I’m trying to decide between two credit cards. One has no annual fee and an 18% interest rate, and the other has a $40 annual fee and an 8.9% interest rate. Should I take the card that’s free or the one that’s $40?

The first card may not charge an annual fee, but that doesn’t mean that it’s "free." It depends on how you use it. Compare other charges besides the annual fee: what is the late payment fee? Over-the-limit fee? Cash advance fee? Some cards may even charge you for customer service calls. Comparing all the fees involved is important. Equally important is the interest rate. If you can lower your interest rate by switching to a new card, you can potentially save hundreds of dollars a year, more than making up for the $40 annual fee.

I pay the minimum payment on my credit card every month, and yet my debt never seems to get any smaller. Will I every pay this off?

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 than 11 years to pay off a debt of $2,000 if you pay only 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.)

My credit card offers special discounts on purchases at certain stores and gives me bonus frequent flier miles. Aren’t those savings worth considering along with the interest rates and annual fees when choosing a card?

Yes, they are worth evaluating. Consider the additional benefits, and weigh them against the amount you would save annually with a lower interest rate card. Factors to consider when choosing a card are: How do you use your card? Do the extra benefits apply to your lifestyle - do you travel frequently or plan to make the purchases on which you may get a discount? If you pay your bill in full every month, then interest rates don’t really concern you and extra bonuses might be the answer. But if you carry a monthly balance (as do most Americans), then a card with a low interest rate will be your best choice.

What is the best credit card?

Choosing the "best" card depends on your personal needs and resources and how you use credit cards. Think about your spending patterns, the benefits you really would use versus the interest rate and fees, how much credit you need and how much you can afford. There are so many options on the market that it shouldn’t be hard to find the card that’s right for you. Remember, you can save money by shopping around.

My daughter is going to college and I thought it would be a smart idea to give her a credit card to get cash advances to use for books and incidentals. That way she won’t need to worry about money or getting caught without cash. Is this a good idea?

While cash advances can look attractive, keep in mind that interest usually accrues from the moment you accept the cash. On some cards, the interest rate on cash advances is higher than the rate on purchases. If you add in transaction fees, annualized interest on cash advances can be more expensive than you think. Cash advances should be used only for real emergencies; your daughter’s book and incidentals will be cheaper charged to a credit or charge card.