One of the hidden costs of a credit card may be the way iii which it computes interest.
The first—and the better way by far for you—is to charge interest on the average daily balance, including new purchases. The second method, which is much less favorable, is the two- cycle average daily balance, including new purchases. Even if you never carry a balance from month to month, keep away from a company that calculates interest this way. You never know when even you might need some emergency money for a few months, and this is an expensive way to get it. Always leave yourself the best option just in case.
Let’s say you charge $1,000 on your credit card for that Cl) player you always wanted. Even though you have the money in your savings account, you think, Well, I might as well get those airline miles, or I might as well just use my credit card and pay it off when the bill comes in. When the bill arrives you’re a little short, but you send in $980 against the $1,000 bill, thinking that a $20 balance is no big deal. Next month when your statement arrives, even though you haven’t charged anything cisc, you see that you now owe $47.60, $20 from the previous balance and interest of $27.60. How can that be? It’s because your credit card uses the two-month average daily balance method. Not so good, if you ask me.
If, on the other hand, your credit card charged interest on the average daily balance, you would have seen a bill for only $32.60—not chopped liver, but certainly better than $47.60. This represents a $20 carryover from the previous balance and $12.60 in interest: about 54 percent in interest savings. This can really add up if you charge and pay off more than $1,000 at a time. Of course, the numbers will vary depending on the interest rate you’re paying and other factors, but no matter what, you must avoid the two-cycle method, especially if you tend to charge and just pay off your balance two months later.
If you spend just a few minutes working on your debt as hard as you work on your job, you’ll at least create intelligent debt— debt at the lowest possible cost. You’ll also become aware of what you really owe, freeing up the paralysis you feel dealing with it. And with your knowledge, you’ll be facing your debt from a position of power, instead of one of weakness. The credit card companies are expecting you to behave a certain way—to be ignorant of the real costs of your debt and too lazy to change it. They want your money. You have got to want your money more than they do, or they’ll get it.
Credit cards really want your business, and if you’re a heavy user, with good credit history, they will make it very easy for you to switch to the card they’re offering. Caryn had discovered that you can switch your balance to an account with a lower (much lower) interest rate with a few phone calls and five minutes of paperwork.
And continued vigilance.
Too-good-to-be-true offers are usually just that: too good to be true. Open and read every credit card offer you receive in the mail. Ask and answer for yourself all the questions that follow. It may be that you have to roll over your debt two or three times a year to get the best deals. That’s a few calls and fifteen minutes of paperwork a year, and it might save you literally hundreds of dollars. When can you stop being so vigilant? When your debt is gone and you’ve taken the steps to guarantee it won’t go back up again.
There’s nothing like credit card debt to paralyze us. The sad part is that most of us don’t have a clue how the cards we have really work. When you were reading Caryn’s story, did you already know as much as she had found out about how the cards work? Probably not. The only thing most of us pay attention to is the interest rate they are charging us, and even then some of us don’t take any action. Even though we know there are credit cards at lesser rates, we just don’t want to deal with it. Grace periods, average daily balances, the forms we might have to fill out . . . most people would rather keep paying 18 percent or more just so they don’t have to deal with it.
Throwing away hundreds of dollars in unnecessary interest payments every year is truly being disrespectful of your money. Caryn was so close to getting the formula right that I told her simply to keep obsessing about it—and acting on what she learned. She has, and little by little she is erasing her debt. She has also become something of a crusader and is starting a business creating a newsletter to keep people up-to-date on all the rates and scams: all she wishes she had known about before.
Caryn tried everything to get out of debt. But the credit card companies kept winning. Every time I start to make a dent on my credit cards, something happens, and boom, I’m right back charged to the max. It’s hard to move $15,000 of debt. For a while I was putting the odd $100 into a savings account and just paying off the minimum, but then I noticed that sometimes my finance charges were bigger than the amount I was putting away. So that was losing money. Before I save any more, I just want to get rid of this debt. It hasn’t helped that my back is bad again, making it hard to work. Since I couldn’t work, I decided to figure out everything there is to know about credit cards, all the fine print, and at least get the best deal I could. I had about five different cards, all with different interest rates, and I got obsessed—with getting a better rate, a bigger grace period, with all the new offers. I figured that some have to be better than others, right?
But it is hard to tell what’s the best deal. They charge every which way. One card sent me a bill saying, hey, you can skip this month’s payment. I thought they were doing me a big favor, but no. They charged interest on the money I should have paid. When the bill came the next month, it had grown by two finance charges. If I had known, I would have paid the money the first month. One time I thought I found a really good deal—5.9 percent. Turned out it was 5.9 percent on the balances I had transferred, but much higher on cash advances
and new purchases. I would have been better off staying with the company that charged me 9.9 percent on everything. Then there was that so-called grace period. I learned the hard way there, too. I thought that no matter what I bought I would have twenty-five days to pay it off before I was charged interest on it. I was Out with a friend and she wanted to buy an anniversary gift for her parents—we were at an art fair and she saw this wonderful sculpture she wanted to buy for them. She didn’t have her credit card with her so I said I’d use mine and she could write me a check and I’d just pay the bill when it came. Done. When I got the bill, I couldn’t believe it. They began charging me interest on that sculpture the day we bought it. But they had told me there was a grace period. When I called them up they said no grace period for me because I carry a balance. Only if I paid off the card every month could I have the grace period. Also, no grace period on cash advances; I found that out the hard way, too. Cash advances cost the highest interest rate, plus a fee on top of that—about 5 percent of the amount I withdrew just for withdrawing it. I hadn’t even thought of that. So I went back and checked. Already this year I had paid $220 in fees for cash advances.
I guess it’s all there, in small type, but who can figure it out? How do you get Out of credit card debt?
In life we are very much influenced by the company we keep. If you have surrounded yourself with people who are healthy, eat well, exercise, and are well balanced, chances are good that you yourself live a vigorous and healthy life. If you surround yourself with people who drink, smoke, take drugs, and so on, I would venture to guess that your vitality level is not so high.
It works the same way with your money; the only way to keep it vital and make it grow is to keep it in a healthy environment. Credit card companies are never good company to keep, unless you’ve chosen one wisely, use it sparingly, for convenience, and pay it off in full every month, with only the rarest exceptions. Being respectful of your money also means being respectful of those to whom you owe money, and being respectful to yourself also means getting out of debt—as fast and efficiently as possible.
Another scenario that plays itself out often in my office is when one spouse or partner has to admit to the other that he or she is hiding debt, usually credit card debt, from the other. That secret Visa card with the growing balance. The department store bill on which you keep paying the minimum balance due, but that never seems to go down. The big check you wrote against your Optima card and haven’t been able to pay off. Cash advances here, cash advances there. You just sort of don’t tell your partner for a while, and then it’s too late to tell.
This terrible secret is a burden to you, if you’re carrying it, and it’s an unfair burden on your partner, who, if you share expenses together, is unconsciously also carrying the debt. Debts can’t be kept secret forever. I’ve had blowups in my office. More than once I’ve heard, “Oh, so that’s the secret. I thought maybe you were having an affair.” Responses to the news vary. Some couples decide to deal with it together, some feel that the person who created the debt has to deal with it. But even if there’s a blowup, the result of letting that secret out is always a relationship that’s truer and more honest.
Please tell your partner if you’re hiding debt. Your integrity and self-respect are more important than whether your partner gets mad at you. Get help if you need it. You’re not alone. Non-profit credit counseling bureaus have been set up all over the country to help in cases lust like yours; call one if you feel you need one. You can get out of debt. So many others have, and you can, too—and once you do, you’ll create so much more money, without being drained by your debt and your secrets.
