Article on Credit Card Debt
Article on credit card debt: learn about the different types of cards available, the pros and cons of each, and what you need to be extra careful about when dealing with credit card debt.
Charge cards, Credit cards, Debit cards
There are three main types of cards: charge cards, credit cards and debit cards. What are the similarities and differences? Charge cards require you to pay off your entire balance every month. There is thus no interest rate or minimum balance that you have to meet. Charge cards also have no spending limit – within appropriate boundaries, that is. Unusual spending activity will still be picked up and might lead to your account being frozen temporarily. However, this usually means that you will need to pay a higher annual fee for this privilege.
Unlike charge cards and credit cards, debit cards do not offer you credit. Your purchases are directly deducted from your bank account. Thus, you can only spend what you have. Using debit cards instead of credit cards is one way to ensure that you do not incur any credit card debt. Debit cards also offer you the convenience of not having to carry large amounts of cash around. However, debit cards do not help you establish a credit rating.
Credit cards offer you a line of credit and you have the flexibility to pay only a portion of your balance. However, this comes at a significant cost: high interest rates. Credit card debt can quickly become your most costly form of debt as interest rates generally hover at around 15%; interest on your mortgage might only be about 5%.
Card consumer credit debt information: Interest charges
Second most important tip in this article on credit card debt: be aware of the different interest calculation methods! Interest charges are usually computed in two ways. The method you should opt for as far as possible is the one where interest is calculated based on your average daily balance. This means that if you pay off a portion of the balance in the first month, you will only pay interest on the remaining portion in the next month.
The other method that you should avoid as far as possible uses the two-cycle average daily balance. This means that the interest you owe is calculated over two billing cycles (two months), instead of just one month. Even if you pay off a portion of the balance in the first month, you will still continue to pay interest on the entire balance in the second month.
Credit card debt information: Schumer Box
The most important tip in this article on credit card debt: always look out for the Schumer box. Under the Fair Credit and Charge Card Disclosure Act, all credit card companies are required to list all costs associated with a credit card on the application form. This information is listed in the Schumer box, usually found in the lower left-hand corner of the form; as you consider a credit card offer, you should turn to this box first, as it contains the most important information you should be aware of.