Twice recently friends have asked me for advice about their credit cards. Their questions brought me to a realization: many people are carrying cards that have onerous annual and other fees, cards that they have no business having.
Consider the example of one of my boys in New York (real name and location withheld), who has a card with a 27 percent annual percentage rate and a $79 annual fee. Ridiculous!
Another friend has what she calls "one of those help-you-rebuild-your-credit" cards". The bank started her out with a low limit of $300, and increases that limit every few months so long as she pays on time. Sounds like a good deal at first, except that she's paying a monthly $6.50 "maintenance fee" and a $100 annual fee. Again, ridiculous, especially when you consider how quickly that $6.50 monthly fee -- which is separate from interest -- can add up if you're already carrying a balance.
What you pay in interest and sometimes fees on credit cards depends on your credit score. That said, there are some things to watch out for if you need a card and are trying to rebuild your credit. There's almost never a good reason to pay an annual fee; even with the credit markets tight, there are any number of cards that don't carry such fees, even when your credit is less than stellar.
If your credit ain't great, it's fair for your card to charge you higher interest and start you with a low balance until you prove you can pay regularly. But there's no reason you should pay them extra money just for the right to hold their card; after all that's what interest is for. And a monthly fee on top of a maintenance fee? If you ever see an offer like that, tear it up, then shred it, then burn it, then bury the ashes.
A better way to go about rebuilding credit would be to look into a decent, secured credit card. These are cards that are backed by an asset, say, your bank account. Your bank will give you a card with a limit that won't exceed how much you have in your checking or savings. That way you have little risk of overspending.
Another idea is to get an unsecured card with fair terms and use it monthly for a small purchase. Spend $10 at Starbucks then immediately pay it off monthly. The card company will have to report to credit bureaus that you're paying the balance in-full every month, and that will help your credit score improve.
3 comments:
Keith, you say you should shy away from credit cards with an annual fee. Do you think it's different for a charge card? For example, American Express "charge" cards, come with an annual fee, but no monthly interest, from what I understand. Is that a better option?
You're right, Lolly, that it is different with a "charge" card like an Amex as opposed to a credit card. The cases I wrote about though, were credit and not charge cards.
Charge cards DO, to my understanding, come with monthly interest, but that's more of a penalty for not following the rules and paying off your balance every month and that's why you have to be careful with them. The point of a charge card is to carry and use it in lieu of cash but only for things you have the money to pay off immediately. Balances aren't meant to be carried, in which case the interest rate wouldn't matter.
The worst are store cards. If you call them and ask them to lower the interest rate, they won't.
I'm very good at avoiding cards that have high interest rates, annual fees and all that other crap.
I told my Mom for her high interest credit cards to call the companies. She has been paying on time, more than the minimum for years so her interest rates should not be so high. I seriously think in her situation it's going to take me sitting her down with her credit cards and the telephone and making her call every single one. I told her it's worth it, all they can say is NO and with her credit record and credit score, they should and probably will say yes.
But it just illustrates that too many people are afraid of their credit card companies when as the consumer we are the ones that really have the power, not them. Because as Keith noted, we can close the account and get another card with someone else, than they would lose out on the business.
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