The hidden costs of credit cards

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Credit cards have become an essential part of everyday life. About 145 million Americans use them, and for almost every kind of purchase. An estimated 40 percent also use them as an easy form of short-term credit, carrying an unpaid balance from month to month. But while card holders may be aware of the relatively high interest rates they’re charged on their balances, they may not be aware of other ways card companies can raise the price they pay for this easy form of credit.

Universal default: A hot topic these days, this is the card issuers’ practice of penalizing you for falling behind on your other credit accounts, even if you haven’t missed a card payment. In some cases, a single late payment to any of your other creditors can trigger the card company to impose a penalty rate, which can be 29 percent or even higher. Reversing the charge can be difficult.

Low minimum payments: Low minimum payments may look like a blessing. But even with new guidelines that have recently caused most credit card companies to increase the minimum amount you’re required to pay each month from around 2 to 4 percent, it can often take a long time to pay off your debt, and you can still end up paying thousands in extra interest charges.

“Teaser” rates: Many people choose a credit card based on its low advertised interest rate -- in some cases, zero percent. But these rates don’t last. Many disappear after six months, and most are gone after a year, leaving you stuck paying a higher rate.

Changeable rates: Not many of us read the fine print on our cardholder agreements, but it often gives the card issuer the right to change its interest rates and its fees for any reason -- and sometimes for no reason. The credit card company often needs to give you only 15 days’ notice before bumping up your interest rate or raising its fees.

Varying rate levels: If you make some purchases at a promotional rate and others at the card’s regular rate, the card company often applies your payments to the lower-rate debt first, leaving you paying off the higher-rate debt. This can also occur if you take cash advances that carry a special higher rate.

Fees, fees, fees: Many cards carry a variety of fees you may not discover until you have to pay them. These include application and processing fees, late payment fees, transaction fees, fees for going over your credit limit, overdraft protection fees and balance transfer fees. And some even impose their late fee if your payment arrives after a designated hour on the due date.

You can avoid some of these costs by reading your card agreement, and by paying off your credit card balance every month. If you are in need of long-term credit, one strategy is to consider other, less costly kinds of loans. One option is a home equity loan, which can allow you to borrow money at a considerably better rate than a credit card. In fact, many cardholders use these loans to consolidate their credit card debt.

A home equity loan often carries a lower rate than a regular personal loan. And, the interest is usually tax-deductible up to $100,000, saving you more money. (Consult a tax advisor for advice on how this would apply to your own particular situation.) The amount you can borrow depends on how much equity you have in your home. You can choose a fixed-rate home equity loan to pay off an existing card balance, or a home equity line of credit (HELOC) to cover occasional costs instead of using your credit card.

Another option is cash-out mortgage refinancing: you refinance your home for more than you currently owe, and take the difference in cash. You can use this money to pay off your credit card balance, or to cover expenses that would have gone on the card. The new debt is paid off at your mortgage rate -- likely much lower than the credit card rate.

Either way, these loans can provide affordable credit -- without a credit card’s extra costs.

 

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