The Credit Card Trap (Part Two)
There's more to managing the way you handle credit cards than paying your bills in full and on time. To be a smart cardholder, you need to remember four words: read the fine print.
Stick to two cards. One common denominator among delinquent cardholders is they're holding on to so many cards. The average person in the major cities has 2-3 cards.
Rana recommends two cards, with one for backup (make sure at least one is an international card). For a lot of people, however, the number of cards is for bragging rights. Having high credit limits give a sense of pride as well. Even the color of the card is a status symbol.
But Rana advises that cardholders review their total credit. "It's not advisable to have so many cards," he explains, "The annual fees on those alone [are prohibitive]."
And if you receive yet another pre-approved card in the mail, don't activate it. Cut it up to prevent identity theft. If you're not using a card, cancel it. "If it has no usage or payment history, it doesn't serve any purpose," says Rana.
Be wary of credit limits. Having a high credit limit or receiving a notification that your limit has been increased may give you a, well, high. But remember some aggressive card companies will very high credit limits, even if it doesn't match your capacity to pay, forcing you to revolve.
In the same way, they offer introductory lower rates (which they then jack up), freebies, huge rebates, and attractive rewards points to get to switch. Don't be easily tempted. Before biting, remember to…
Read the fine print. You need to read the terms and conditions. If you don't understand some items, and I'll bet there'll be some, call the company to get a clarification.
Figure out how interest is computed. One vague area that needs a clear explanation is the interest rate. Rana says Equitable Card charges 3.25% on your outstanding balance, based on simple interest computation (principal x rate x time).
Other companies hide the total effective interest rate. They may charge 3.25% but based on your average daily balance, not your outstanding balance. They may also compute interest based on a shorter number of days, instead of a full 30 days. So, instead of looking at the nominal rate, check the annual percentage rate or APR.
Figure out how the balance is computed. If your balance is P10,000 and you manage to pay P9,000, you'd think you'd be charged an interest for your remaining outstanding balance of P1,000, right? Think again.
Many card companies use your average daily balance or ADB as the basis for interest charges. So they take into account your beginning balance, new purchases, payments, and ending balance.
Figure out when your payment is posted. Some companies post your check payment when it clears, not when you deposit it. Equitable Card considers your bill paid when you deposit it on the due date. Others will consider it late. Check the same when paying online. If you pay on the due date but after banking hours, some cards might post it the following day.
Learn when to transfer balances. When should you transfer balances to another card? If the new card has better features and rates. In most cases, however, revolvers are the ones who like to transfer to take advantage of lower rates offered for transferred balances. Some card companies even waive the annual fee. Just make sure the interest on your succeeding regular purchases is competitive.
It doesn't hurt to ask. If you're ordinarily a transactor and was late on a payment once, such that you get charged a late penalty fee, call your card company and ask for it to be waived. Most likely, they'll comply.
Learn about billing cycles. Some cards don't charge a penalty even if you pay after the due date, as long as you do pay a few days before your statement date. Why? Because of the way their systems work. For instance, if your due date is on the 25th and your statement date is on the 5th, if you pay on the 30th, you won't get charged anything because the system will check your balance perhaps a few days before the 5th. It's an industry secret, but it doesn't apply to all credit card companies.
Learn what causes red flags. Credit card companies track several parameters, such as usage, payments, and delinquencies. Don't get paranoid however if you're late with a payment or two, or if you just pay the minimum, or max out your credit limit. "The important thing," Rana says, "is paying it."
What to do when you can't pay. However, if you're delinquent, a collection mechanism kicks in. A reminder is sent when you're 30 days past due. A telemarketer may call you to remind you of a missed payment. You'll get a stronger note if you're 60 days past due. And your account is automatically suspended. If you're 90 days past due, you'll receive a stronger letter and the card company sends out its collection agents.
The worst scenario is when the card company files a suit to force you to pay. When your card is reported as a delinquent account, you take the risk that won't be given a loan facility like a car or housing loan when you apply. And this is not erased from your record. And as Rana points out, it will take a lot of convincing again before you can avail of a loan from a legitimate creditor.
If you find yourself in this situation, try negotiating with your card company to come up with an acceptable restructured payment plan that will fix the numbers years you can pay off your balance, the minimum amount you're expected to pay every month, and the interest rate you'll be charged. You may be asked to issue post-dated checks and a stop credit facility will be enforced, such that you can't charge new purchases to your card anymore.
If you have a spending problem, cut all your cards altogether and pay cash for purchases.
