- A bank has the right to change the average percentage rate (APR), fees or other credit terms unilaterally.
- The average APR* is 16% and this rate can soar as high as 30 percent to 40 percent with a late payment.
- In addition, late fees range from $25 to $50 and over-the-limit fees range from $25 to $39.
- Credit cards aren’t bad—credit-card debt is usually bad.
- Can carry instead of cash.
- Helps track spending.
- Can help establish credit.
- Covers emergencies.
- Can sometimes get monetary benefits—miles on an airline or a yearly cash-back bonus.
Credit Cards - The Hard Part
- Up to you to use them wisely.
- Easy to live beyond your means.
- Dangerous when used to supplement your income.
- High interest rates and fees.
- Can end up ruining your credit rating which will cost you more.
How Many Credit Cards Should You Have?
- Most Americans carry between 5 & 10 credit cards, some up to 50 – which could wreak havoc on your credit score.
- Most experts say there’s no single magic number.
- It depends on how much you spend and how much you can pay off.
- The more cards you have the bigger the risk for racking up debt and damaging your credit.
- Don’t believe the myth that the more credit cards you have, the better.
Which Credit Cards Should I Carry?
- Some consumer advocates and debt advisors recommend you own two to six credit cards.
- Use Visa, MasterCard, American Express or Discover, because virtually all merchants will take any one of them.
- Have a card that has a low interest rate to use for ‘real’ emergencies.
- It’s a good idea for your other credit card to provide reward points, air miles or something that gives you something back. This card doesn’t have to have a low rate if you pay it off every month.
Some Important Do’s and Don’ts
- Keep your debt ratio low, creditors don’t like to see a card almost maxed out; you look like someone who is using too much credit and has trouble managing debt.
- Keep your debt ratio under 50%. If your credit card has a $5,000 limit, don’t carry a balance of more than $2,500.
- Make payments on time. One or two late fees can bring down your credit score and increase the rates on your other credit cards.
- Do not run up your credit, keeping your balances less than 30% of your credit limit on each card.
- Do not close too many cards at once. It will cause your debt-to-credit ratio to fall.
- Don’t close your oldest accounts even if you find a better card.
- Keeping up with payments will build a better credit rating than opening a lot of credit card accounts.
More Credit Card Tips
- Do stick with one card and a back-up for emergencies.
- Sticking to one card will minimize the number of bills you pay and maximize your card awards.
- If you carry a balance get/use a card with the lowest rate – that lasts - you can qualify for.
- The lower the rate the easier it is to pay off any balance.
- Beware of 0%-balance transfer teaser rates they may have fees as high as 4% of the balance.
- The American Express Blue care charges 4.99% for the life of the balance you transfer.
- If you pay in full select a rewards card you can really use (why use an airline miles card if you rarely fly) as your number one card.
- The HSBC Direct Rewards care pays 5% cash back on gas, drugs and groceries, and 1% on all charges above $3,000.
Source: Money – November 2006
* The annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. Typically the APR is found next to the rate.
Example:
30-year fixed 8% 1 point 8.107% APR
The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan.
The APR is a very confusing number! Even mortgage bankers and brokers admit it is confusing. The APR is designed to measure the "true cost of a loan." It creates a level playing field for lenders. It prevents lenders from advertising a low rate and hiding fees.
If life were easy, all you would have to do is compare APRs from the lenders/brokers you are working with, then pick the easiest one and you would have the right loan. Right? Wrong!
Unfortunately, different lenders calculate APRs differently! So a loan with a lower APR is not necessarily a better rate. The best way to compare loans in the author's opinion is to ask lenders to provide you with a good-faith estimate of their costs on the same type of program (e.g. 30-year fixed) at the same interest rate. Then delete all fees that are independent of the loan such as homeowners insurance, title fees, escrow fees, attorney fees, etc. Now add up all the loan fees. The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees.
The reason why APRs are confusing is because the rules to compute APR are not clearly defined.
What fees are included in the APR?
The following fees ARE generally included in the APR:
- Points - both discount points and origination points
- Pre-paid interest. The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30!
- Loan-processing fee
- Underwriting fee
- Document-preparation fee
- Private mortgage-insurance
- The following fees are SOMETIMES included in the APR:
- Loan-application fee
- Credit life insurance (insurance that pays off the mortgage in the event of a borrowers death)
The following fees are normally NOT included in the APR:
- Title or abstract fee
- Escrow fee
- Attorney fee
- Notary fee
- Document preparation (charged by the closing agent)
- Home-inspection fees
- Recording fee
- Transfer taxes
- Credit report
- Appraisal fee
An APR does not tell you how long your rate is locked for. A lender who offers you a 10-day rate lock may have a lower APR than a lender who offers you a 60-day rate lock!
Calculating APRs on adjustable and balloon loans is even more complex because future rates are unknown. The result is even more confusion about how lenders calculate APRs.
Do not attempt to compare a 30-year loan with a 15-year loan using their respective APRs. A 15-year loan may have a lower interest rate, but could have a higher APR, since the loan fees are amortized over a shorter period of time.
Finally, many lenders do not even know what they include in their APR because they use software programs to compute their APRs. It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APRs!
Conclusion :
Use the APR as a starting point to compare loans. The APR is a result of a complex calculation and not clearly defined. There is no substitute to getting a good-faith estimate from each lender to compare costs. Remember to exclude those costs that are independent of the loan.
