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Week of 1.2.2009

What You Should Know About Your Credit Card
By Manisha Thakor

Manisha Thakor Manisha Thakor is a financial guru and co-author of the book "On My Own Two Feet: A Modern Girl's Guide to Personal Finance"

Credit cards can be your friends or your foes, depending on how you use them. If used for pure convenience—to keep from having to lug around wads of cash or to keep track of what you spend where—they are your friends. Use them without an understanding of their true potential to create financial shock and awe, and they are a foe like no other. To help you keep your relationship with your plastic a healthy one, here's a quick check-list of things you should know about your credit card.

1. Having too many credit cards can cause you to become financially obese

Have a question about your credit card? Email us and we'll answer selected questions online next week.
The ideal number of credit cards is two—one for primary use and one for a back up. If you have work-related expenses that you get reimbursed for, a third one to help keep the book-keeping straightforward is also ok. More than this, however, is not only unnecessary but also potentially dangerous to your financial health. First, studies show people spend more when they have plastic in their hand (the "payment" doesn't feel as real). Second, with so many cards it's easy to lose track of how much you are spending and when all the bills are due. This can lead to the late payment of your bills and my next point...

2. Your interest rate is not set in stone

Want to know a dirty little secret? Skip the supermarket tabloids and head straight for the fine print on your credit card statements. What you will see there will blow you away. Huge numbers of credit card companies currently utilize what is called a "universal default clause" (note, Congress is investigating this practice). In plain English what this means is that if you are late on ANY of your bills (not just for that credit card) the company reserves the right to jack up your interest rate to sky-high levels. And even if you are not, with advance notice (again, in the fine print) they can often still do it. And you agreed to this treatment when you signed up for the card, right there in the fine print. Oh, and by the way, when you use your credit card to get cash from an ATM, or use those "free checks" that come in the mail, more often than not you are charged a higher interest rate with no grace period—the interest rate clock starts ticking the minute that money touches your hands). Federal regulators have recently adopted some new rules to help protect consumers from some types of rate increases. However, the playing field still has many potholes in it to trip you up, so keep your eyes wide open.

3. You may have fallen victim to the new card "bait and switch"

This happens when you think you're getting a brand new card with a low rate, but the card that actually arrives in the mail has a much higher rate. How can this be? Ahhh, once again it is the joys of the fine print. The most attractive rates are generally specified as being "for qualified applicants only." Have a wart or two on your credit report and whoosh, you go into the higher rate category. So even after getting your new card, check the interest rate.

4. If you make just the minimum payment, you have effectively DOUBLED your purchase price.

Suppose you have an "average" credit card with an 18% interest rate and a 3% minimum required monthly payment. You charge a $50 pair of jeans to the card, and each month when the bill comes you pay just the minimum. You are feeling virtuous because you are paying your bills on time. Alas, credit cards are not free money. You are paying dearly for the right to repay those jeans over time. In fact, the way the math works out, you are actually paying almost $100 for those jeans when you factor in all the interest charges. You may be thinking, "But can't I negotiate a lower interest rate?" Good luck with that. In today's credit strapped world, the old advice to call your credit card company and make the case that you are a valued customer and should have your interest rate lowered (or your credit limit raised) is quickly going the way of bell bottoms. A much better solution is to only charge items to your credit card that you can afford to pay off in full at the end of each month. If you are struggling with credit card debt and are contemplating bankruptcy, you can contact a CREDIBLE credit-counseling agency to better understand your options. Alas, there are many unscrupulous folks with their shingles out there as well. A division of the U.S. Department of Justice called the U.S. Trustee's Office has a list of credit-counseling agency in your area that they have vetted.

5. Yes, you can complain.

The good news is that if you feel you have been treated unfairly by your credit card company—without cause—you can complain. The catch phrase here is "without cause." If you agreed to the terms, then violated them, you are out of luck. But if, for instance, you have an item on your monthly bill that has appeared in error and you properly notify the credit card company by return receipt mail, and yet they still charge you interest or penalties, you have a right under the Fair Credit Billing Act to lodge a formal complaint.

Refer to this nifty listing from the Federal Reserve on credit card complaints to see where to go and what to do in this case.

When it comes to knowing your credit cards, the most important thing to remember is that credit cards exist for one and only one reason—to make profits for the credit card companies. You can "outsmart" them if you use the cards for convenience and pay the bill off in full at the end of each month. This will also help you build a solid credit history. But carry a balance from month to month and you enter treacherous waters where "buyer beware" is the name of the game. Keeping the above checklist in mind, can help you maintain the upper hand.

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