Taking Charge of
Your Credit Cards
Many of our general tips starting on Cutting Your Costs: Simple Strategies for Saving Money on Loans and Credit Cards can help save you money on credit cards. For example, it's important to pay your credit card bill and other debts on time to avoid late-payment fees and additional interest costs. Here are more suggestions.
1. When choosing a credit card, ask yourself if you plan to pay the balance in full each month. Many people don't pay their bill each month — they always carry a balance and pay interest on it. Yet many of these same people sign up for a card because it has no annual fee, without considering the benefits of a card with a lower interest rate or a more generous grace period (before interest begins accumulating). In the long run, a card that doesn't charge an annual fee could end up costing you far more in interest than a card that charges an annual fee.
In general, if you expect to pay your balance in full most months, look for a card with a full grace period and no annual fee. However, if you plan on carrying a balance, then a card with an annual fee and low APR (Annual Percentage Rate) may be a better choice.
2. Read and save the "disclosures" describing a card's features and fees so you know how to save money. "When it comes to information about the terms of your credit card, be a pack rat," said Janet Kincaid, FDIC Senior Consumer Affairs Officer.
Key information to look for and keep: What is the interest rate and how can it change? Is there an annual fee? What about charges for late payments, returned checks, balance transfers or exceeding your credit limit? What's the cost of a "cash advance" — typically meaning you use your credit card to get cash from an ATM or to make a purchase using one of the blank "convenience checks" sent with monthly statements? Cash advances are likely to carry sizable upfront fees, a high interest rate and no grace period before interest begins accumulating. Also, stay on top of fee increases by reading and saving the disclosures sent in monthly statements or other mailings.
Avoiding additional charges isn't the only reason to become an avid reader of your credit card company's literature. Potential cost savings built into your card also are worth exploring. For example, your credit card may automatically include, at no extra charge, extended warranties on purchases and insurance for car rentals. Your card also may offer cash back on purchases, rewards good for airline travel or products and services, and various other extras. Also be aware of the rules governing these perks because limitations, fees and deadlines may greatly reduce their value.
3. Be especially aware of your card issuer's billing practices, which can significantly affect your costs. How your card company treats the balances on which you are charged interest can be critical. Here are examples of potentially high-cost practices that many people don't know about even though card issuers must disclose them:
Two-cycle billing: This billing practice is rare but is used by some card issuers. Practices may vary but, in general, if you pay your credit card bill in full one month but then only pay a portion of the bill the next month, your interest charges ultimately will be based on two months of card charges and not one. This may result in you paying more in interest charges than you would under the more common one-cycle billing method. To find out if your card is subject to two-cycle billing, review the cardholder agreement and disclosures from your lender or call their customer service number.
Payment allocation: This involves cards with multi-tiered interest rates. For example, there may be a low rate on a balance transferred from another card, a higher rate on new purchases, and an even higher rate on a cash advance. If you pay only part of your monthly bill, card companies typically will apply your payment to the balance with the lowest interest rate first, while the highest-rate balance continues to run up interest costs until you pay the entire balance.
Universal default: This happens when a card issuer increases a customer's interest rate because he or she made late payments to other lenders or had an overall decline in a credit score — even if that customer paid the card bill in full and on time. While this once-common practice is rare, be aware that it could be used.
4. Know your credit limit and stay below it. There are two problems with going over your card's credit limit. One is that your card issuer will charge you a penalty, which can be expensive, typically about $30 for each instance. Also, exceeding your credit limit may damage your credit score, which may mean higher interest rates, now and in the future.
To be confident you are within your credit limit, Kincaid recommends the following. "Periodically check your balance by phone or online to make sure you stay within your limit," she said. "Also give yourself an extra cushion — either try not to get too close to your credit limit or call the card company to get a higher limit if you anticipate a special need, such as a vacation or major purchase."