CREDIT
Costs Of Credit
As stated in Credit Card Basics, credit is the exchange of goods and/or services for a promise to repay at a later date for a given fee. That given fee usually comes in the form of finance charges, which include, but are not limited to interest charges, late fees, and annual fees.
Late fees can easily be avoided by paying at least the minimum balance on or before the due date.
Annual fees, which are fixed amounts paid to the credit card company for the privilege to hold their credit card, can be eliminated if students are willing to shop for cards that do not charge annual fees.
Although students should be aware of all of the fees associated with the use of credit cards, the most important charge to be noted is the interest rate charge and whether the rate is variable or fixed. This information can be found in the terms and conditions pamphlet that comes with your card.
- Variable Rates: Credit cards with variable rate plans are linked to adjustments in the prime rate, which is set by the Federal Reserve.
- Fixed Rates: Under a fixed rate plan, the consumer's monthly interest rate is based on the card's specific APR (annual percentage rate) divided by 12.
- However, a "fixed rate" can be changed for any reason, as long as a credit card company first gives you 15 days notice.
- Know that many issuers raise rates immediately on cardholders who make late payments. Some companies may even increase your rate based on your late payments to other credit cards (Listed as “Universal Default” in terms and conditions), so beware of those late payments!
Useful links:
- FoundationForCreditEducation.org
- Universal Default, What it means to Your Bottom Line
- Cost of Consumer Credit
- Avoid Interest Rate Traps
