Saturday, August 29, 2015

Consumer Finances: Credit Card Interest and Debt

I have several credit cards, but I have never, ever carried a balance on those credit cards.  I use them for nearly all purchases, because I get airline miles and/or cash back on my purchases, and I get up to a 30-day grace period on all purchases.  I pay off my credit card balances each months and I never carry a balance.

If you use your credit cards this way, you never pay interest, late fees, or other fees.  The card is essentially a free way to delay paying for the things you buy -- but only a short delay.

If you ever carry a balance on your credit card (you don't pay the account in full each month), if you are late on a credit card payment, or you get cash advances from the credit card -- then watch out!  This is one of the worst things you can ever do from a financial standpoint.

Credit cards charge a ridiculous amount if you are late or miss a payment.  If you miss a payment, you will be charge late fees (usually around $25).  Even worse, you will now be stuck paying interest on ALL purchases from now on.  There is no longer a grace period.

Ask this question to your credit card issuer, for instance.  Let's say one month you don't pay off your entire balance, or you are late with a payment.  This is a general question, not specific. 

You had a balance of $250.  You were late.  Or you only paid $150. 
You have a small balance left of $100.  You have to pay a late fee.  You have to pay interest on that original balance of $250. 

Here's the question.  Normally you would have a grace period for new purchases.  For instance, you had a balance due of $250 on 7-22.  You paid late, on 7-23.  Therefore the bank charges a late fee and interest. Normally, you would pay off the entire balance before 7-22.  New purchases after that date would not be subject to interest and would not need to be paid until 8-22. 

Now, however, you are carrying a balance.  You buy stuff after 7-22.  You will be charged interest immediately on the stuff you buy after 7-22. 
To repeat:

If you are late on payment, your ENTIRE balance will be charged interest. This will include all new charges.  Once you pay off the last statement's overdue balance, then interest stops being charged.
You will be charged interest immediately on the stuff you buy after 7-22.

By the way, I never use my debit cards, which my bank gives me -- except to get cash at my bank's ATM machines. When you use a debit card, the withdrawal occurs immediately from your bank account -- there is no grace period.  That's not that big a deal, but merchants who accept debit cards often charge a fee to use them, and not credit cards.  I was in a fast-food restaurant a few weeks ago and noticed that they charged $1 for use of a debit card, and nothing if I used a credit card.  Last and worst -- you are not as well protected against fraudulent use of a debit card than a credit card.  With a credit card, you are AT WORST liable for only $50 of fraudulent transactions.  With debit cards, it is up to your bank whether they will reimburse you for fraudulent use of your debit cards.  Don't take my word for it and do check other sources than this blog post for further explanation.  An example:

More consumer information coming.  

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