Credit Cards 8 Secrets Revealed

Credit card debt can be detrimental to your mental and financial states. Plastic is not always fantastic. Using credit cards responsibly builds a good credit history, so you can land a loan when you need one. Credit cards allow you to avoid carrying large amounts of cash, which can be convenient when you have to purchase something expensive.

But credit cards work a bit like Dr. Jekyll and Mr. Hyde: they have a hidden ugly side. If your charging gets out of control, you may find yourself handcuffed to a large monthly bill with escalating interest charges. Try putting a dent in that balance with your monthly cash flow, and you may have to charge your way out of a cashless pinch. And if you pay only the bare minimum, the balance on the card never disappears.

"From a financial point of view, it's in the company's interest to have consumers carry the largest amount of debt they can possibly repay," said Stephen Brobeck, executive director at the Consumer Federation of America. "They encourage large balances, with offers to send you another card, raise your credit limit, and lower your minimum payment."

Too small a grace period, or none at all. Historically, credit cards offered a grace period of about 30 days. If you paid your balance in full during that time, you were charged no interest on your purchases. But card companies don't make money on good customers. As such, the length of many grace periods is starting to wane.

"Some credit cards don't offer a grace period anymore," said Fritz Elmendorf, vice president of communications at the Consumer Bankers Association.

According to CardWeb.com, the average grace period on a card from one of the major issuers is about 22 days. But some cards have shortened the period to 20 days, and others have none at all. With no grace period, you're charged interest on the purchase from the day you make it, probably before the credit card company has even paid the store on your behalf.

"Card companies have shaved off the official time from 30 to 25 days or less," said Stephen Brobeck, executive director of the Consumer Federation of America. "These days, we recommend you pay the bill within one week."

Cash advances. Regardless of your terms, you almost never get a grace period for cash advances, which means you begin paying interest on them right away, Elmendorf said. Adding insult to injury, the interest rates on cash advances are typically higher than the ordinary rate on card purchases.

"You may be tempted to put your credit card in the ATM and get cash, but it's very expensive," Elmendorf said.

Interest rates on cash advances can climb as high as 30 percent, similar to the fees assessed after a late payment.

Two-cycle billing. Your credit card balance is computed using one of three methods: the adjusted balance method, the average daily balance method, and the two-cycle balance method.

The adjusted balance method is the most consumer-friendly: interest is charged on the account balance remaining after payments and credits during the billing cycle. The average daily balance method is charges interest on your average balance during the billing cycle.

The one to watch out for is the two-cycle balance method, where the interest on your average daily balance is computed using both your purchases from that billing cycle and those from the month before.

"If I charged a bunch of things in February, even if I paid them off completely, that figure would still be used along with my March purchases in order to calculate my average daily balance for March," said Brad Dakake, a consumer advocate at the Massachusetts Public Interest Research Group (MASSPIRG). "The average consumer probably has no idea - it's very sneaky."

Article continued at money.cnn.com/2002/03/12/pf/banking/q_creditcard/

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