BORROWING -  CREDIT CARDS
 
 

I’m sure you know that credit cards come in a variety of forms and are issued by banks, oil companies, retail establishments, and travel and entertainment enterprises (like American Express and Diners Club). But, there are important differences among these types of credit cards, and all of them must be further distinguished from another card that looks like a credit card but isn’t: the debit card.
 

Bank Credit Cards

Known to us as Visa or MasterCard, these cards are issued by banks, brokerage firms, and other organizations through the United States and are honored by hundreds of thousands of establishments worldwide. Typical terms for these bank cards include the following:

v Small annual fees (though a few banks still issue free cards)

v Credit limits from $500 for first-time cardholders to $10,000 or more

v No interest on new charges that are paid within 20 to 30 days of receipt of the bill

v Interest rates usually ranging from 14% to 22% depending on the state in  which the card is issued

v Small minimum monthly payments.
 

Although most cards offer 20 to 30 days’ grace without incurring interest charges, some have shorter grace periods, and others have none at all. Of course, the best way to use a credit card is to pay off the entire balance due each month. If you have credit card loans, devise a plan now to get rid of them. Credit card problems are the single greatest cause of personal bankruptcies. Don’t succumb to credit card temptation.

What’s in a name?

Not all Visa and MasterCards are the same. The difference in interest rates, how your monthly balance is computed, and annual fees can be substantial from one bank to another and from state to state.

Premium cards

Visa and MasterCard issue premium cards as rivals to the American Express Gold Card. Interest rates for premium cards are usually the same as those for regular cards, but annual fees may be more than twice the amount. In addition to higher credit limits, these premium cards often include no-fee traveler’s checks, higher cash-advance and check-cashing limits, and free
credit life insurance. Unless you are so lacking in self-esteem that you need to impress a department store clerk with your gold or platinum card, save your money and stick with a regular card like the rest of us mortals.

Whichever card you choose, it is important to read the applications carefully. Read the fine print: if the interest rate is not apparent, ask about it.

Cash advances

Most credit cards offer cash advances. Don’t consider these advances to be free money. In fact, they represent incredibly expensive loans. In addition to interest that begins to accumulate as soon as the advance is made, loan fees are charged, often two percent of the loan amount. So don’t use your cash advance “privilege” unless it’s an emergency. And if something you
desperately wants goes on sale, that still doesn’t constitute a financial emergency.

Beating the credit card companies at their own game

There are various factors that affect the billing of credit cards. Use them to your advantage. For example, if you know the billing cycle, use your cards on days that will give the longest use of the money without interest. Obtain six to eight weeks of free credit by buying just after the billing date and paying in full just before the due date.

If you expect to have to run card loan balances, one card may actually be cheaper than two because of the break point. For example, if the annual percentage rate (APR) is 18 percent on the first $500 and 12 percent on amounts over that, it is better to run a $1,000 balance on one card than a $500 balance on two. (If your cards are issued by the same bank, ask the
bank to combine the billing and charge the lower combined rate.)

Enhancements

Card-issuers are trying to lure customers by augmenting their cards with incentives known as enhancements. These may include cash advances, luxury suites, check-cashing services, and card and travel insurance. Think twice before signing up for these enhancements. Some of them are of little value to begin with (like credit card insurance). Even if the issuer doesn’t charge for these services directly, you will probably end up paying for them through larger annual fees and higher interest rates. No matter what, remember that prompt payment of credit card bills is in your best interest.

Debit cards

Many banks issue MasterCard, Visa, and/or their own debit cards. Debit cards look like regular credit cards, but instead of sending monthly bills, the bank transfers payments directly from your checking, savings, or asset management account as soon as it receives notice of the charge. Because the cards are directly linked to your bank accounts, you must monitor them as
closely as you do your checkbook.

Debit cards offer some convenience in paying bills, forcing you to pay immediately and therefore not carry a balance on which you’d pay interest. Unless you need the forced discipline of paying your bills immediately, however, debit cards, on balance, don’t have any additional virtues.

Travel and entertainment cards

American Express, Diners club, and Carte Blanche are the major travel and entertainment cards. These cards are honored at some establishments that do not honor regular bank cards, such as some prestige clothing stores and restaurants. On the other hand, many establishments that honor bank cards do not honor the travel and entertainment cards.

Unique features

Usually, payment of travel and entertainment card bills must be made in full, within 20 to 30 days of receipt of the bill. There are limited exceptions to this policy, however. There is no interest if charges are paid on time, but credit privileges may be canceled if they are not. There is no present spending limit, but eligibility requirements are much stricter than with other cards. Technically, these cards are charge cards, not credit cards; their main purpose is convenience, not credit. Since you have to pay your bill in its entirety each month, these are excellent cards to have if you have difficulty resisting the temptation to run up loan balances on your bank credit card.

If you are planning a trip, travel and entertainment cards offer some advantages over regular bank cards. An airline ticket and hotel and meal charges might quickly exhaust the credit line on a Visa or MasterCard,
whereas travel and entertainment cards have no preset spending limits. Just as with premium bank credit cards, don’t waste your money on travel and entertainment gold (or worse, “platinum” cards), unless you will really benefit from the extra features that these premium cards offer.