Does a credit card make sense for me?

There are benefits and risks to making purchases with credit. These tips from the Attorney General's Office can help you protect yourself when using a credit card.

The difference between a debit card and a credit card

Payment for purchases made with debit cards are deducted directly from your checking account, so, unlike credit cards, you are not charged interest for debit card transactions. Debit cards provide you the ease of cash-less buying, without financing costs, but, remember you must have the money in your checking account when you make the purchase. Unlike credit cards, you may not have the right to dispute problem purchases.

Annual disclosure statements

Many lenders offer well-advertised attractive benefits, such as travel discounts or extra protection if an item is lost or stolen, to encourage you to get their credit card. But, you should read your annual disclosure statement closely to see if the very benefits which enticed you to get the card aren't quietly discontinued over time.

Linking a credit card with checking or savings accounts

If you have a checking or savings account with the same bank from which you have a credit card, when you signed up for your credit card you may have authorized the bank to automatically withdraw funds from your savings or checking account if you are delinquent. If you are unsure, contact your bank. To avoid automatic funds withdrawal, pay your bill on time, get a credit card from a different lender, or contact your bank and ask about un-linking the accounts.

Fees and interest rates

Annual fees and finance charges can significantly increase your credit costs. Annual fees are set by the card issuer and interest rates may vary by the prime lending rate. To get lower fees and interest rates, shop around for lenders who don't require an annual fee or offer lower annual fees and interest rates. Rates and fees may be particularly competitive when transferring balances.

Backdated Interest 

Generally, when you charge an item to your credit card, the credit card company doesn't pay the merchant for several days. You will pay less interest if the company doesn't begin charging you interest until it pays the merchant, rather than charging you from the day on which you made the purchase, a practice known as backdating. To avoid backdating, you should pay your balance in full every month or find another credit card company which does not backdate interest.

Retroactive Hikes in an Interest Rate.

To entice you to get a card with them, or transfer existing balances, some lenders offer lower rates, known as "teasers," which are only effective for a limited time. When the teaser period expires, a higher interest rate may be charged. In some instances, the higher rate is applied retroactively to your existing balance at the time the teaser rate expires-meaning if you do not pay off the whole balance within the teaser time frame you may have to pay interest on the whole amount even if you have paid some of it off. To avoid incurring the retroactive rate hike, you should read the fine print in regards to retroactive rate hikes and avoid such offers. If you find you have already signed up for such a card, you should pay your balance in full or transfer the balance to a lower interest card before the teaser rate expires.

Cash advances

You can get cash advances which can resolve a cash crisis. However, cash advances usually aren't free, because most credit card companies charge a transaction fee, as high as 5% of the advance, on top of interest on the cash advance. Before taking a cash advance, even if your card advertises "no finance charges", find out if there is a transaction fee.

Minimum monthly payments

Lenders often want consumers to skip a monthly payment or make minimum monthly payments (as low as 2% of your monthly balance) without being in default. You may find it tempting to skip a monthly payment, or to pay the minimum of your monthly balance, because it keeps more of your money in your pocket. But, making minimum payments benefits the lender only, because the longer it takes you to pay off your balance, the more money the lender makes in finance charges. To not get hit with higher finance charges pay as much as possible of your monthly balance.

Grace periods

Most credit cards offer "grace periods" where interest is not charged for new purchases, as long as the new unpaid balance is paid in full each month. But, be aware that credit card terms can be misleading, and not all grace periods are the same. For example, with many cards, consumers will not enjoy any grace period on new purchases if a balance is carried over from month to month. With these cards, you will have to pay the whole balance each month to avoid finance charges on new purchases. Some credit card companies offer no grace periods, whether the unpaid balance is paid each month or not. So, before signing up for a credit card, read the grace period terms carefully. Make sure that you ask the credit card company for an explanation if you do not understand the terms. If you do not like the terms or do not think you can pay your entire balance each month, find a credit card lender who does offer a grace period under which interest is not charged on new purchases.

Limitations on interest rates and late charges

National banks can charge all their credit card customers under the interest and late charge laws of their home state-it doesn't matter where you live! For example, Massachusetts law generally limits credit card annual interest rates to 18% and late charge penalties to $10 per payment. But, if you have a credit card with a national bank located in a different state, you may pay higher interest rates and late penalties, if they are allowed in that state. Make sure you are aware of which state the bank is in and that you understand the credit terms before you take on a new credit card.

Late Payment Penalties and Default Rates

In addition to the interest charges when you carry a balance on your credit card, the costs of credit include late fees and default rates. If you do not manage your account and pay it on time, many credit cards charge large late fees ($20, $25, $35) if they do not receive your payment by the due date. Also, if you make late payments twice within a year, many cards trigger "default" rates that you will pay on your balance. These rates may be five or ten points higher than your regular rate, which may result in interest rates of 25%, 28%, 30%, or even higher.

For more detailed information about consumer rights and credit, you can read The Attorney General’s Guide to Consumer Credit. You may also call the Attorney General’s Consumer Advocacy & Response Hotline at (617) 727-8400.

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