Credit Cards and You: Easy to Get, (Sometimes) Difficult to Pay Back

Credit Cards and You: Easy to Get, (Sometimes) Difficult to Pay Back

Credit cards are the most popular type of consumer loan account used by Americans today. They can be a great financial tool, since credit cards allow borrowers the flexibility to make purchases at a variety of retail establishments worldwide without carrying large sums of cash. They also spare consumers the hassles sometimes associated with utilizing personal checks and traveler’s checks. However, while credit cards offer a convenient source of credit, they pose a big responsibility, since credit card misuse can damage your credit rating and quickly lead to seemingly insurmountable debt.
 
Chances are your mailbox is full of offers from credit card issuers, and every week the typical American household receives several pre-approved credit card applications in the mail.

Opt-Out & Clean Your Mailbox

If you would like to remove yourself (opt-out) from most mail-generated credit card offers, call this safe and convenient toll-free number provided by the three major credit reporting agencies (Experian, Equifax, and Trans Union):

1-888-567-8688 / (1-888-5-OPT-OUT)

Borrower Beware: While credit cards make it easy to buy something now and pay for it later, continuing to charge while carrying an outstanding balance can quickly cause debt to snowball.  A “tarnished” credit history can make financing a car, gaining approval on a mortgage loan, or obtaining insurance more difficult and expensive (higher APRs/premiums). While some consumers choose to pay their card balance in full each month, others find themselves making only the minimum payment each billing cycle.




CONSUMER CREDIT TIP: While it may not be possible to pay off your card’s balance in full each month, consumers should make as large a payment as can comfortably be afforded to avoid being locked into credit card debt for a long period of time. Paying off (or at aggressively paying down) your balance can be a sound financial strategy which will significantly lessen finance charges!



Credit cards are unsecured loans and thus feature higher APRs than most secured loans. This means that consumers who overspend on credit cards are often faced with substantial balances which must be paid back at high rates of interest.

Comparison Shopping for Credit Cards

As was discussed in the first chapter of this guide, with risk-based lending, a good credit score and “clean” credit history can lead to lower interest rates. Credit cards are no exception to this rule. For the best borrowers, APRs can be 9.9% or lower! Currently, the national average APR charged by credit card lenders is around 16%.  Borrowers with troubled credit histories can expect to be approved for cards with rates in excess of 20% APR. Consumers interested in obtaining a credit card would be wise to check with both local and out-of-state lenders to find the best combination of rates (APRs) and fees. Direct mailings and reputable Internet sites are also good sources for comparison shopping.

Annual Fees

Although this fee has become less prevalent due to intense competition in the credit card industry, some card issuers still charge an annual fee, typically $15 to $55, for the use of their credit card. Some credit card companies attempt to offset an annual fee though offering lower interest rates or other incentives. In contrast, some credit cards do not carry an annual fee, but instead feature higher APRs. When faced with this trade-off, borrowers who consistently pay off their balances in full each month are advised to seek a card without an annual fee.

Grace Period

Many credit cards lenders offer their customers “grace periods” (the time between the date of a purchase and the date the lender starts charging interest on the purchase). A standard grace period allows an opportunity to avoid finance charges by paying the card’s balance in full each and every month. Many credit cards carry a 20-25 day grace period within which the balance can be paid in full each month. If the card issuer offers no grace period, they may impose a finance charge from the date cardholders use their card, or from the date each transaction is posted to the account. Make sure to ask a potential card issuer if the all-important grace period is a feature of their credit card.  In addition, most grace periods disappear, even for new purchases, once you start running a monthly balance on your card.





Every month, the consumer outreach staff here at the Bureau of Consumer Credit Protection receives calls from Maine citizens who are thousands of dollars in debt with credit card lenders. These consumers are oftentimes struggling to make minimum monthly payments on “maxed out” cards. When faced with this unenviable situation, a consumer’s options are many. Enrolling in credit counseling, reviewing personal spending (re-budgeting), taking on additional employment, selling assets, consolidating existing loans, or even filing for bankruptcy are several possible solutions.

Repayment Options and Reward Cards

Some consumers repay their credit card balance in full each month, while others make only the minimum monthly payment. Credit cards can serve as a valuable financial tool to consumers who use their cards for travel and emergencies, and pay their balances in full each month. Some disciplined consumers use their credit cards like checkbooks, charging most of their daily purchases and then paying off their balances in full each month. Reward cards offer the added incentive of free goods and services, and through frequent use, consumers accumulate points they can trade in for airline miles, gift certificates, or even cash rebates. Unfortunately, a growing number of credit card users have fallen into the habit of only making minimum monthly payments, and subsequently struggle with long-term balances subject to high APRs.

The chart below shows the repayment period for a consumer who only makes the minimum monthly payment (4% of the current balance in most purchase examples below), on a credit card with an 18% APR:

“The Twelve Days of Debt”
Item	Cost of Item	Minimum Monthly Payment	Finance Charge	Months to Pay Off Purchase	Final Cost of Item w/Interest
One Blueberry Pie	$10	$10	$ .15	2	$10.15
Two Lobster Dinners	$50	$10	$2.38	6	$52.38
Three Pairs of Hiking Boots	$100	$10	$9.16	11	$109.16
Four Whale Watch Tours	$200	$10	$39.58	24 (2 years)	$239.58
Five Adirondack Chairs	$400	$16	$155.69	51	$555.69
Six Pup Tents	$600	$24	$275.67	67 (more than 5 years)	$875.67
Seven Days at a Seaside Bed & Breakfast	$800	$32	$395.65	78	$1,195.65
Eight Pairs Binoculars	$1,000	$40	$513.63	87	$1,513.63
Nine Ski Jackets	$2,000	$80	$1,115.73	114	$3,115.73
Ten Sets of Snowshoes	$2,500	$100	$1,415.69	123 (more than 10 years)	$3,915.69
Eleven Kayaks	$5,000	$200	$2,915.66	150	$7,915.66
Twelve Inflatable Rafts	$10,000	$400	$5,915.67	178 (almost 15 years!)	$15,915.67

·        Needless to say, the Bureau highly recommends that credit card holders avoid long-term credit card repayment patterns and their substantial finance charges!