Stupid Ways to Spend Your Money #5
Credit card offers (Part 2) and pre-paid debit cards
This is a continuation of my post “Stupid Ways to Spend Your Money #4 - Credit card offers (Part 1)
..Some products, services, and investments that are highly advertised (even here on gather.com) are simply bad and expensive products, things with many fine prints, and some are simply run as scams and fraudulent schemes. I will bring out main points, and describe the remedy to get rid or out of them.
Last post discussed the pro’s and con’s of credit card itself, as compared to other forms of payment, including debit card, and cash in general. This post will delve into pro’s and con’s of credit cards OFFERS.
Types of Credit Card Introductory Offers
Introductory offers are limited-time deals or offers exclusive to new cardholders.
Here are three popular examples of credit card introductory offers.
1. Introductory APRs- These are special low interest rates that you’ll get for a limited time — often anywhere from three months to a year. Sometimes a credit card offer will include more than one introductory APR, with different specialty rates for different types of transactions. For example, you might get an introductory balance transfer offer to get you to switch from your existing card. Another common example is an introductory purchase rate, letting you save money on new purchases.
Balance transfer cards may offer lower fees that help you pay off debts, but there are still costs that should be compared before you choose a new card. The two biggest expenses people usually have to deal with when it comes to transferring a balance are the processing fees and the actual interest rates (both introductory and ongoing). These costs can help make or break an attempt to cut down credit card debt, which is why it is important to consider them before choosing a transfer offer. To give you an idea of how to factor in these charges, here we look at how both transfer fees and interest rates can affect your debts and what you can do to get the most out of any balance transfer deal.
a. Balance Transfer Fees- Most balance transfer cards charge a processing fee for the service, which is usually around 3% but could be higher. While $10 is not much, if you have a $3,000 balance, you would be paying $120 to change to one of these cards. That works out to be almost three times more than the monthly interest costs you would face if that balance was on a card with an APR of 20%, so it is important to be aware of this expense and look for cards that have a lower fee.
b. Interest Rate Costs- Both the introductory and ongoing APRs could have a huge impact on the cost of your balance transfer. While cards that offer 0% when you first switch may save money initially, once rates revert you could face a big jump in interest costs. For instance, if you had a 0% rate for the first 15 statement periods and managed to pay the balance down to $2,000 before the rates reverted to 21%, all of a sudden you would have an extra $35 in interest payments due each month.
Unless you increased the amount of money you put towards the balance, the added cost of interest could double the amount of time it takes to pay off the card. This cost is one of the reasons why it is good to choose a card that has an ongoing low APR as well as a balance transfer offer, so that you can keep reducing the balance significantly even after the introductory period is over.
2. Annual Fee Discounts- Even if a credit card doesn’t include an introductory offer of a low interest rate, you could still save money. That’s because other cards let you save on the annual fee instead. For example, you might pay no annual fee for your first year as a cardholder. Others might waive that fee (or others) if you maintain other accounts with the issuing bank. Or you might get a discount for your first year (such as only being charged halfof the usual annual fee, but the full fee in later years). Amount you save with this deal is usually miniscule.
3. Bonus Rewards Points- Some rewards credit cards have their own special introductory offers. A popular example is to give you bonus rewards points. You usually have to do something (like make an eligible purchase or charge a certain amount of money) within a limited time to get this bonus. But they can sometimes be quite large. So if you were going to spend the money anyway (only on the things you need, not want), it’s a good way to earn more points toward whatever reward you want.
Remedy: Just remember that most credit card offers are geared to make the issuer money in the long run. If you choose to sign up for an introductory offer, work out the math to be sure you are not taken for a ride in the long run. If you continually pay the minimum balance on interest based credit card, you may be better off to pay down the credit card balance and switch to a debit card. If you are disciplined, and pay off the balance at the end of each billing cycle, you may want to consider the bonus points or miles on the introductory offer, but canceling the card soon after you receive your reward.
The biggest reasons NOT to sign up for new credit card have been explained in earlier posts:
- Credit card holders on average spend 12% to 18% more on purchases when compared to cash purchase
- Most people are trying to reduce their debt-to-income ratio. Don't reverse this trend.
- Consumers are apprehensive about negatively affecting their credit score. More credit can adversely affect your FICO score in the long run
One more thing to remember is that these credit cards are full of gotcha fees that can bite for minor missteps like being one day late on your payment, or forgetting to update the automatic bill pay information. So if you don’t want the snake to bite you, don’t play with snakes.
Pre-paid debit cards have come out in large numbers pushed by celebrities, including Suze Orman - a financial guru. These are tremendously dangerous, and I have one advice: Don't get it! These cards are full of predatory fees and penalties that will make you sick if you were to read the fine prints (which are not readily available). Here are just a few negative reasons associated with pre-paid cards:
- Expensive fees for opening and maintaining the account
- Fees for loading money on the account or using the card for purchases
- Very limited, if any, reporting to the credit bureaus
- Does not help improve your credit the same way a credit card would
- More expensive than opening a checking account and using an ATM card
- If you lose the card, it's same as losing cash
Next post will discuss Bankruptcy Service
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